Author: Diandra Ramsammy

Only earlier this year, someone I know told me – “What are you worried about? Airlines don’t go bankrupt anymore.” My ears perk up when I hear a statement shared with so much conviction. I don’t recall ever holding shares of a company that went bankrupt. I held tickets of three bankrupt airlines in my life, though, and the third one was only this year soon after my colleague’s confident declaration. Why do businesses go bankrupt anyway, and how can we avoid owning them?

I held the first ticket of a bankrupt airline exactly around the time I met my future mentor, boss, and now business partner, Mr. François Sicart. We had a morning meeting scheduled in Paris; I was still a graduate student at the time. I was hoping to go see my family in Poland for the holidays. As luck would have it, the airline went bankrupt only days before our appointment and my travel — I lost my ticket. My student budget didn’t have much wiggle room for that kind of a surprise, but it was a priceless lesson nonetheless.

I had the hardest time finding a reasonably priced alternative so last minute during a busy travel time. The second most desirable option would have me travel out of Paris, missing my long-awaited meeting with Mr. Sicart. I didn’t know yet, but our conversation was to lead to an internship opportunity and eventually to a wonderful career I have enjoyed ever since. I went with the next option, a mode of transportation leaving Paris only hours after this very memorable meeting. Right after our conversation, I ran home, changed, and chased a 24-hour bus back to Poland instead of a low-cost flight with an airline that was no longer there.

This experience made a lasting impression on the mind of a newly minted value investor who was trying to tame his excitement about the stock market with a reasonable dose of caution to balance it out. A bankrupt airline will do that to you!

Holding shares of a company that goes bankrupt is a zero outcome. You lose all in that particular investment. It’s something we do our best to avoid. I haven’t owned one bankrupt company, but that’s not because I was lucky. It’s a very disciplined choice of avoiding certain businesses that have a very real chance of going completely bust.

Why would anyone be interested in those companies, you could wonder. Some of them make a miraculous comeback once in a blue moon and can generate eye-popping returns, while the alternative worst-case scenario is a zero. I vividly remember the near-bankrupt companies during the Great Financial Crisis of 2008-2010. Their outcomes were rather binary: great or terrible.

Some argue that you could own a big number of those near-bust duds, and then some of them will possibly survive. We won’t argue against it, but it’s not a strategy for our stomach and quality of sleep. To me, the biggest risk is the compromise. If you let a handful of potential zeros into the portfolio, you run a risk of eventually holding all your investments in such stocks. The nature of most crises happens to bring all weak companies to their knees together at the same time. I have no interest in seeing how such a portfolio would look in March 2020, March 2009, or any previous market freefall.

***

Now and then, some investors see their stocks drop 10%-20%, even 50%. This might be too much to stomach at times. The price drop can be as much a paper loss from which one can recover and see further growth as much as a sign of further trouble. A bankrupt company is quite a final loss, a permanent loss.

To be fair, there are companies that almost go bankrupt, and their stocks drop 90% or more. To me, it is as bad as a zero. It is a very hard place to be and equally hard to recover from.

With bankrupt companies, it’s a lot like with Charlie Munger’s frequently shared goal: “All I want to know is where I’m going to die, so I’ll never go there.” If you know what kind of a company can go bankrupt and avoid them, you’ll be just fine. Charlie will celebrate his 100^th birthday next year, so if he can do it, adding decades to his life, we can definitely attempt the same, extending our investment results.

A company goes bankrupt when it can’t handle its debt anymore. There are laws in place that govern how the assets and business of a company will be used to clear its debts. The debt holder, who lent money to the company, might recoup some of the committed capital. What happens with the shareholder? You guessed – if you hold common stock, you will like get zero. You might see some formerly bankrupt companies re-emerge even with the same name and logo, but don’t be fooled; it’s a whole new set of shareholders that get to own it. The previous common stock gets canceled. Ouch!

I held tickets of three bankrupt airlines when they went bankrupt. I flew with other airlines that had gone bankrupt since. It’s the nature of that particular business. Why is that?

Airlines often have high fixed assets funded with substantial debt and are not very flexible. They have high fixed costs, which makes them very vulnerable during any downturn (including a global pandemic). It’s also a cyclical business since a plane ticket is a discretionary purchase that travelers are readily willing to forego and postpone. Therefore, the demand is volatile and can vanish for long enough to get the airline in trouble. On top of that, the industry suffers from limited customer loyalty and a highly price-sensitive buyer. It’s also a highly regulated and very competitive business. With any unfortunate combination of events, airlines are bound to either go bankrupt or hope for governmental help.

Now, if you flip this logic on its head or invert and wonder what kind of company has minimal if any, chance of going bankrupt, you will see a very different picture. It’s a business with no or limited or manageable debt; it has sustainable profits and a loyal customer base. Customers are not too price-sensitive either. Ideally, you’d like to see low fixed costs so that the bigger the business grows, the higher the margins get, and profits flow with preferably limited additional capital needs. Lastly, if the capital gets reinvested, it produces higher returns and is incremental to margins.

Those businesses exist, but they aren’t usually available at bargain prices. It takes patience and discipline to scoop them up when an opportunity arises, and it eventually does.

Three times is the charm – I wrote down jokingly when I found out another airline went bust as I readied to travel. I knew that an idea for an article was born!

I purchased and held these three tickets because I had limited choice. Either it was the only connection that made sense or the only ticket price that worked for me. It was a necessary risk at the time but a very limited risk, an inconvenience rather. When it comes to buying stocks, “no” is always a valid choice.

This time around, a twenty-year-old regional airline failed to agree with the unions and collapsed under the weight of the debt, seeing no return to positive cash flow in the near future. I only found out about its demise days before the flight. We chose an alternative and filed a claim with the credit company to get our cash back. I keep my fingers crossed, but I don’t lose my sleep over it, and anyway, the experience inspired this article and brought back some memories – made it worth it!

I’ll keep flying and buying airline tickets, and I might come across another dud again, but I made a commitment a long time ago that I’ll do my best to avoid absolute zeros investing. It’s good to remember how those zeros can come about and then head the other way anytime one appears in sight. Will some of them experience a miraculous turnaround? Maybe, but again, we won’t lose our sleep over it, wait and hope for the best.

Happy Investing!

Bogumil Baranowski

Published: 9/13/2023

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (”Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

Warren Buffett and Charlie Munger were asked about emotions at the last Berkshire Hathaway Annual Meeting. You’d think it’s an unlikely question to ask two investing legends at the shareholder meeting, is it though?

When I was in business school, we didn’t talk much about emotions. How does it feel when the market plummets by a third within weeks? No spreadsheet or chart can capture that sensation, but the pit of your stomach certainly can. In March 2020, I fielded numerous calls from both clients and fellow investors, granting me a firsthand experience of the profound emotional turmoil many were grappling with. This experience taught me more about emotions than any investment manual I’ve ever read.

As investment advisors to affluent families and individuals, we offer experience and knowledge. However, we believe what truly distinguishes an advisor is empathy. There are times when the numbers align, the strategy seems perfect, but the plan doesn’t resonate emotionally. We don’t dismiss this feeling. We pay attention. We refer to it as the “quality of sleep” factor.

Many argue that bear markets are the most challenging due to plummeting stock prices and pervasive gloom. I’d contend that bull markets are trickier. Watching neighbors accumulate wealth at a pace faster than you can be daunting. Charlie Munger himself argues that markets are driven not by greed but by envy. Perhaps it’s a tomato, to-mah-to debate, or maybe greed and envy are inextricably linked. Either way, these emotions can lure even the most disciplined investors into treacherous territory, leading them to take undue risks and overlook potential pitfalls.

Whether in a rising, falling, or stagnant market, in my experience, emotions inevitably surface. Regardless of how foolproof a plan appears, it’s crucial to gauge how our investors feel. A hypothetical portfolio crafted with an elegant formula remains theoretical. We believe that a real-world stock portfolio demands empathy and understanding, not just numerical data.

Another arena where emotions play a pivotal role is where practice confronts principles. Fundamental monetary and investment concepts aren’t intricate: saving, investing with patience, avoiding pitfalls, maintaining discipline, and steering clear of fleeting trends are principles championed by many.Many claim to be a “long-term investor” until the market takes a nosedive. That’s when we discern who can endure transient setbacks.

I’m reminded of Warren Buffett’s introduction to Benjamin Graham’s The Intelligent Investor. Buffett emphasizes that while the book offers a “sound intellectual framework,” we must provide emotional discipline. I’ve found that this notion is even more pertinent today. Our emotional equilibrium is constantly challenged by an incessant deluge of news ranging from the stocks we hold to global affairs.

Previously, we’d await the evening broadcast or the morning newspaper. Now, instantaneous buzzes from our pockets or wrists deliver headlines incessantly.

One facet of emotions largely omitted in my education is intuition. In the quantifiable realm of investing, intuition often seems out of place. Some opine that intuition aggregates our amassed knowledge and experiences, assisting us when facts and logic remain ambiguous. Consider times when something felt right or wrong without a discernible reason. I’ve attended meetings where company narratives seemed too idyllic, and though no explicit fact or figure raised concerns immediately, an innate hesitancy stopped me from proceeding.

While contemporary business school curricula encompass emotional intelligence, behavioral economics, and psychology, perhaps the emotional side of investing can’t be taught in a conventional sense. Maybe it’s more akin to learning to cycle, requiring more than just classroom instruction.

At the Annual Meeting, Warren Buffett explained how they have made plenty of bad investment decisions but never made an emotional investment decision. He added that you don’t want to be a no-emotion person all your life, but you want to be a no-emotion person making investment decisions. That’s something we can all aspire toward.

Cultivating empathy is a journey. Managing emotions demands continuous effort, and intuition sometimes proves to be a valuable ally. I love numbers and spreadsheets, but recognizing and sometimes trusting our emotions can offer an edge in our investment journey. Isn’t it worth delving deeper, occasionally pausing to inquire: how does it feel?

Happy Investing!

Bogumil Baranowski

Published: 8/29/2023

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (”Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

We witnessed a whirlwind of events during the three pandemic-stricken years from 2020 to 2022. Investors endured a crash and recovery in 2020, a broad bull market in 2021, followed by a year of pause and correction in 2022.

Throughout these years, market participants and all of us experienced major shifts. Interest rates were slashed to zero before soaring to multi-decade highs, the economy plunged only to rebound significantly, and the stock market embarked on its own tumultuous journey. The post-pandemic boom era ushered in a wave of “right-sizing” among businesses.

The year 2021 was a true litmus test for many investors. I can’t recall a time when the fear of missing out was more pronounced. It seems that even the most disciplined and seasoned market participants were enticed to take a leap, often resulting in losses from investments in profitless businesses, digital assets, and more. The surge in speculative activity may have broken some records.

In contrast, 2022 seemed to be a rude awakening for many. We, however, focused on remaining patient, disciplined and deliberate, and our decisions about what NOT to invest in mattered. In essence, we steered clear of the most overheated market segments. Interestingly, the 2022 sell-off saw both stocks and bonds decline in price overall. A more nuanced view reveals that bonds with longer-term maturities dropped more significantly due to the swift rise in interest rates. To prepare for such a potential surprise, we kept our idle cash in short-term US treasuries.

So far, 2023 has brought in relative calm, especially compared to the previous two years. After trillions were lost, the fervor around cryptocurrencies, NFTs, SPACs, Meme stocks, and more has notably declined. This quieter atmosphere has been a welcome respite for us. We’ve stayed true to our principles, continually identifying opportunities and making strategic investments when the prices have been reasonable. Slow and steady.

Since the Last Market Update Letter (8/2022)

In our previous letter, we highlighted the cyclical nature of economic indicators, noting that several key measures — such as interest rates, the 10-year treasury rate, and unemployment — had returned to pre-pandemic levels. Likewise, many stocks relinquished the gains they made during the pandemic rally.

However, that’s not an accurate reflection of the current state. Interest rates have continued to climb, the market — particularly the tech sector — has persisted in its recovery, and large-scale tech layoffs have garnered headlines. The conflict in Ukraine rages on, oil prices reached a peak before marginally retreating, and the shadow of a potential recession seems to loom over investors’ minds. Moreover, the market’s recovery has been uneven, primarily driven by a small subset of large-cap stocks.

Inflation, Recession and Interest Rates

We are stock pickers, business pickers. We choose businesses we’d like to own and decide what price we are willing to pay. With the bottom-up mindset, we do keep an eye on the top-down big picture. No matter how great the businesses are, they all operate in a certain macroeconomic context. We don’t make any particular predictions, but we do look out the window.

As we shared last time, those three years may feel like a round trip for many investors, but inflation is a metric that was in a different place than anything we have seen in some 30-40 years.

Inflation started to cool down from the peak read of 9.1% in June 2022 (the highest in 40 years) to 3% in May 2023. Fed Fund rate went up from 0% in March 2023 to 5%-5.25% after the last hike in May 2023 (the highest level since 2007, the fastest speed of hikes). We welcome higher rates, it’s nice to see a healthy yield on idle cash, and a tone down speculative activity that zero rates invited earlier.

The other phenomenon is the inverted curve yield. It’s a moment when near-term rates are higher than long-term rates. Looking at the difference between the 10-Year Treasury and a 2-Year Treasury, it dropped to a negative 1%, and it’s reversing recently. The last time it was negative was in 2006, and it hasn’t been this negative since 1981. It’s usually driven by higher demand for long-term government bonds, which implies an expectation of a decline in longer-term rates as a result of deteriorating future economic performance.

A combination of pandemic-era supply and demand shocks combined with a massive fiscal and monetary intervention fired up inflation to levels we haven’t seen in 40 years. It’s encouraging to see the inflation cool down. High inflation can be a very disorienting force for all market participants, from consumers to businesses and governments.

The economy has slowed down with a 2% real GDP growth, below the 2021 level of 4-7%, but it’s above two slightly negative reads in the first half of 2022. Beyond the economic pandemic ups and downs, including a negative 30% in q2’20 and up 30% in q3’20 (GDP change), businesses seem to be “right-sizing” and searching for a new normal, more sustainable level of sales. This ebb and flow has caused a lot more variety in stock price outcomes – more to choose from for a discerning stock picker.

We are yet again reminded how the market is not the economy, and the economy is not the market. When many may feel the least comfortable investing given the macro backdrop, the best opportunities may abound.

 

 

More opportunities in an uneven market recovery.

With the rollercoaster ride of the last few years, we are returning to fundamentals – earnings, cash flows, profits – all that businesses are really about. A lot of former market darlings have experienced a big 50-90% price collapse. Many of them are still of no interest to us. The market, though, has knocked down many quality businesses to prices we haven’t seen in a while, and they still haven’t participated in the recovery. Some companies are a lot better than they were before COVID and may start to look increasingly attractive.

If you look closer at the last 6-12 months and the YTD rise in stocks, it’s driven by a handful of stocks that are up and brought the indices higher, but many are down or flat. The S&P 500 without seven mega-cap stocks was still flat for the year only in May. The other way to analyze it is to compare the index between the market cap weighted (which is how it’s built) and equal-weighted (where each stock has the same position size); they usually track each other as the market rises more broadly. It’s very glaring to see how the two metrics were in sync until March looking YTD, and the gap grew to 10 percentage points.

Bank runs and AI.

In addition to general market observations, we think it’s crucial to highlight two phenomena: bank runs and the emergence of AI (Artificial Intelligence). If this letter were a time capsule, these two occurrences would certainly be remembered.

In brief, the sharp rise in interest rates resulted in substantial paper losses for some banks due to the treasuries they held. Banks profit from borrowing at lower rates and lending at higher ones. However, the rapid shift in interest rates, the fastest on record between 2022 and 2023, had a damaging effect on some banks. Those that experienced the most substantial deposit inflows in the previous year were hit hardest. Simply put, they invested the most at the worst of times right ahead of a historic rate spike.

Banks depend on the confidence of their depositors. While banks could have simply waited for the full payout from the bonds they held upon maturity, the erosion of client trust triggered bank runs, a phenomenon not seen in the U.S. since the Great Depression. Fortunately, the intervention of the regulators helped to restore depositor confidence.

Separate from banking issues, AI has been a key topic of discussion this year. Although AI isn’t new and is widely used in everything from movie recommendations by streaming services to fraud detection at your bank, one AI application has especially captivated public attention: ChatGPT (Chat Generative Pre-Trained Transformer).

Released in late November 2022, and having garnered over 100 million users by June 2023, ChatGPT started to revolutionize how we find and organize data through conversational interaction. It’s innovative, though not without flaws, and its effectiveness is largely dependent on the data it can access and the quality of the questions it’s asked.

As often happens in investing, novel and exciting developments don’t always make for obvious investment opportunities. We’re still observing how ChatGPT will impact existing business models, professions, and even education as a whole, and what kinds of new innovations it will inspire. This anticipation and uncertainty are a fascinating aspect of investing, as we strive to identify emerging sources of profit and cash flow amid the constant flux of business evolution.

Nonetheless, ChatGPT, and artificial intelligence chatbots in general, we believe represent some of the most thrilling technological trends in recent history. We eagerly watch their progress, incorporate their utility where applicable, and anticipate their continued evolution and development.

 

Long-term Goals

Our long-term goal remains the same for all the assets we manage. We intend to both preserve and grow the capital over time. We seek to double our clients’ wealth every 5-15 years, which translates to a 5-15% annual rate of return over the long run, but we would like to accomplish it without exposing the portfolios to the risk of a permanent loss of capital. Of course, performance cannot be guaranteed, and past performance is not indicative of future results.

Our strategy can be described as a long-term patient contrarian. All securities are selected through an in-house research process. Our investment horizon for each individual holding is usually 3-5 years.

We intend to hold between 30-60 stocks, mostly US equities, but we may invest in foreign securities as well. We don’t use any leverage; we don’t own any derivatives. We may supplement the strategy with exchange-traded funds (some of them may use leverage or derivatives).

We don’t have a predefined portfolio composition target. We may hold cash at times, but we prefer to own businesses, and when the opportunities abound and prices are right, we will likely be close to fully invested.

What we wrote before applies today: “as much as we pay attention to the overall market trends, we like to look at our performance independently from the benchmark. As long as the businesses we own report improving fundamentals, and the market eventually prices them accordingly, we are happy.”

What’s ahead?

The COVID years brought about a lot of innovation, big leaps in productivity, new ways of doing business. At the same time, big capital was raised to fund a lot of new projects, while recent tech layoffs are making talent available to smaller, promising businesses without the scale of their mega-cap peers.

As public equity investors, we are curious to see what kind of new companies will grow out of this peculiar set of circumstances and have already become public or will become public in the coming years.

We believe the US economy is still the biggest, healthiest, and most diversified in the world. Given its depth, size, and liquidity, the US stock market seems to remain the most appealing home for the most innovative, new companies, even if they originated in Europe, Asia, Africa, Australia, or South America. At the same time, US companies can be global and benefit from long-term growth and prosperity around the world. They operate under US laws, follow US disclosure requirements, and promote a shareholder-friendly culture, making them appealing investment choices for us. We are optimistic about the US, and the US business, while near-term, we remain cautious about the stock market as a whole. We are happy with our stock portfolio of selected, vetted, well-researched businesses.

What do we expect going forward? We build the portfolio for any possible scenario, and our goal always is to be the least wrong with our investment choices. Given the level of uncertainty from inflation, economic slowdown, interest rates to new policies, various geopolitical shifts and tensions, we’d expect more buying opportunities for patient and disciplined investors.

Performance

There were a few pivotal moments in the last three years. First, we acted quickly in March 2020, and built up positions in a variety of quality businesses. We held a steady course in 2021 when we saw FOMO-driven speculative spirits took over the markets. In 2022, what we didn’t own helped us the most, while our holdings held their ground. Through the last 18 months, we added a new selection of stocks that became available at attractive prices as the market corrected.

We have been happy with the holdings we bought, and their performance shows that stock selection mostly met or even exceeded our expectations.

We remain optimistic about the long-term growth prospects of the US and the world economy.

Slow and steady wins the race remains our mantra as we look ahead toward new investment opportunities.  

 

Happy Investing!

Bogumil Baranowski

Published: 8/2/2023

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

If two people start with nothing, one is earning $100,000 a year, the other $50,000, but the first one is left with $5,000 after all taxes and expenses, and the second one with $10,000, which one is richer? One would need almost twenty years to save one year of expenses, the other four years. When it comes to personal finance, the concepts can get a bit confusing. Let me explain.

We join our clients on their journey at a point when they are financially comfortable. Whether through inheritance, business, or career success, they have accumulated enough wealth to set them apart from most people in their countries and the world. They are long past, or they never had to cut their maxed-out credit cards or had their internet or electricity disconnected because of a lapsed payment.

We start the conversation when our clients decide they want to see their nest egg last a lifetime or a family fortune serve many generations. It is refreshing to look at the underlying principles that might have become second nature but still need to be followed to achieve big-picture, long-term success – keeping the money.

When we analyze a business, we look at sales, costs, and profits, but the last item is the one that gets most of our attention. The example I shared of the two individuals with $100,000 and $50,000 salaries is no different than two businesses. The ranges can be even more extreme. One company can have $100 billion in sales and book $1 billion in profit. The other may have $5 billion in sales and $2 billion in profit.

$2 billion is more than $1 billion, no matter how much in sales it took to generate it. If anything, the higher the margin, profit divided by sales, the better the quality of the business. It usually means it has a stronger competitive position. Not getting too technical, but the actual cash flow after reinvestment in the business can tell us even more about the business. If a business needs only a small portion of the profit reinvested in the operations (new equipment, new facilities, etc.), and more left for the shareholder, the happier we are. Last but not least, if the reinvested capital earns high returns, it puts an additional smile on our faces.

Then you have the U.S. government or any government in the world. Somehow, many governments manage to even spend $150 on each $100 in tax revenue. You can’t run a household for too long this way. The governments get away with it by growing the outstanding debt. It’s the proverbial kicking of a can. If history teaches us anything, eventually, the government defaults on its debt, and one way or the other, needs to address the looming problem.

Sometimes it’s a manageable restructuring, other times, it’s a messy collapse, and since the government can be a big spender in some countries, the economic hit might be very pronounced. The most challenging situation happens when a country borrows most in another currency, usually the dollar. If the exchange rates collapse, too, the domestic tax revenue might never catch up with dollar payments.

I grew up in Poland, a country that technically defaulted on its dollar-denominated 1970s debt when I was one year old. The debts were settled, paid off, and partially forgiven when I was 14 (the mid-1990s). Many countries shared a similar path. It’s nothing new and will likely be repeated.

The U.S. has what we believe is a very privileged position; its debt is in its own currency, which happens to be the reserve and trade currency of the world. It’s got a lot more room to overborrow and overspend. There is some limit to it, and we are yet to see when and how we reach it, and it’s nothing to do with the ‘debt ceiling’ but with the investors’ willingness to buy and hold the U.S. government debt. It’s a privilege, NOT a right, but apparently, each country has to learn it again and again.

If the government wanted to set an example, they’d collect $100 in taxes, use $50, and return to you, the taxpayer, the $50 they didn’t use! The annual tax refund that many are excited about is the money you overpaid in taxes the year before. In the example above, the government collected more in taxes than it needed in a particular year. It doesn’t usually happen; I can’t actually think of an example.

Back to profits, though. Whether your household revenue comes from a salary, real estate assets, a business, a stock portfolio, royalties, and more, the top line is revenue. That amount needs to be taxed, and then all expenses follow. Usually, the rent, the mortgage, and your home is the biggest ticket item, and then transportation, food, medical expenses, education, and more. The labels are the same if you have a multi-million dollar household or a national median household, which is around $70,000.

Looking rich and being rich is not the same. A $100,000 household spending almost all they earn will obviously “look” a lot richer than a $50,000 household. All the visible proofs of wealth: a car, a house, and travel will differ. In our example, the first one saves or has a profit of $5,000 at the end of the year, the latter $10,000.

The concept of wealth gets even more interesting when you see it as how much a household makes, spends and saves, and actually possesses. Usually, the curiosity ends with the first question, and unless you talk about someone on the Forbes list, the last question doesn’t come up. It’s the middle, spending, and saving that makes all the difference, though.

Certain personal finance experts these days bring to our attention how spending more than we earn and growing debt is a source of stress and will eventually get us in trouble. Their advice is the same as a business or government would need. Cut spending, and look for ways to grow earnings. It’s a challenge not only for average household budgets. I spoke recently with a Great Depression era expert Nicki Woodard who studies the lives of the richest people of the era, Barbara Hutton, Doris Duke, Huntington Hartford, and others.

They were born to fortunes that were almost unimaginable to spend, yet many of them accomplished just that. On the one hand, there is no limit to spending; on the other, coming from a $30 million household and living in a $3 million household with a $30 million taste will get us to the same troubles over debt and overspending.

Charlie Munger, Warren Buffett’s wise business partner of few words but much wisdom, tells us to keep our expectations in check. I think it’s a piece of universal advice. The principles of personal finance are the same for a $70,000 household, a trillion-dollar corporation, and for the world’s largest economy. Spend less than you earn, save, and invest.

The governments won’t take this advice; they can always tax more, default, restructure, print money, and more. Corporations that want to have a loyal shareholder base eventually show discipline and profits. Individuals might have the least wiggle room here. At the end of the day, it’s your own quality of sleep, and somehow, we all sleep better when we have savings worth a few months of expenses and even better when we know we might not have to work for money another day in our life. The best truths are the most obvious but the hardest to embrace.

Next time you see a neighbor with a brand new top-of-the-line car, think of the profit of your household and theirs; you might still be closer to a better quality of sleep than your neighbor will ever be—just food for thought.

Happy Investing!

Bogumil Baranowski

Published: 6/8/2023

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (”Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

I grew up in Poland and saw the last decade of a failed economic experiment where everything was owned and operated by the government. Hardly anything ever worked, and nothing was ever on time. I thought the whole world worked this way; fortunately, it doesn’t! The Iron Curtain fell, and an unbelievable economic miracle followed. This young mind was already shaped, and I grew to appreciate having a backup plan and never trusting that any rescue was coming.

Those early days might be a fading memory now, but when I see myself make investment decisions or even small life choices, I look through the prism of those early years. It gives me a silent edge in a world where most think nothing can ever go wrong. We have same-day deliveries; you don’t even need a spare toothbrush at home anymore. A knight in shiny armor will always come around, even if your bank spectacularly goes bust. I get it, but I still love having a contingency plan, even if there is no crisis in sight. Let me explain.

Once I arrived in Brussels as an exchange student almost a quarter of a century ago, I immediately noticed how ATMs regularly ran out of cash by Friday evening. You could count on it! No pun intended. I learned that not everything works all the time, even in the charming capital of Europe. My fellow students who lived nearby would always know that I had the cash they could borrow interest-free. Maybe I set a bad example that later gave us zero-rate interest policies? I don’t know. Some of them are European bankers themselves now. Cash bars and restaurants are rare now, so they don’t need weekend bailouts from a good friend.

I learned another lesson. My first commuter train into New York City got delayed by a few hours, making me miss lunch with my soon-to-be boss Francois Sicart. Patsy Jaganath, our partner now at Sicart, took my call that day and kindly rescheduled the lunch to another day. It wasn’t a fluke; it happened two dozen more times in my years of commuting.

You could safely assume that pretty much nothing worked in my early childhood in Poland, but I realized as I continued my education that many things aren’t perfect, even in Brussels or New York City.

A few friends that sailed with me know well that I always have a contingency plan, Plan B, C, D. I’ll have the whole alphabet if I have to! The goal is to make it safely from a harbor to a harbor. You have to be ready to pivot and adapt. The forces of nature are to be respected. Investing is very similar in that way. The folly of the crowds does not differ from an ocean with a sudden squall that gives us chills and rips the sail apart.

If you invest long enough, pitfalls will happen. It’s not a question of “if” but how many times over. I always have spare cash at home; I take earlier trains. I follow my wife’s motto: “On time means you are late.” I always have lots of what Ben Graham (the father of value investing) called “a margin of safety” in my life. Yes, in the aggregate, I probably have waited too long at the airports, and I could have cut some arrivals shorter, but I have never missed a flight in my life.

It starts with throwing an umbrella into your backpack. If it doesn’t rain, that’s alright; it’s a minimal cost and effort. Having cash and extra credit cards traveling that’s another step.

In investing, it helps to avoid the most obvious dangers. These are all the investments that no contingency plan can even save. If you invest over a lifetime and avoid all recent fads, you’ll be already ahead. If you avoid leverage, derivatives, and companies with no real business or profits, that’s another leap forward. You’ll be even further ahead if you have idle cash to take advantage of opportunities after the bull market crashes.

Those decisions start to add up and compound very quickly, and most of all, they give our clients and us peace of mind, and that’s absolutely priceless.

My grandma likes to say that the odds of rain dramatically fall if you have an umbrella with you. I don’t know if she has research to back it; maybe a lifetime of experience instead. If nothing ever goes wrong, and the contingency plan is that umbrella on the bottom of the backpack, so be it.

Either way, I continue to love a good contingency plan when it comes to cash in the pocket and a well-designed thought-through portfolio of stocks.

The last three years have felt like a test in many ways, not just in markets but daily life. Extra home supplies came in handy; acting cautiously while investing helped too. It was a global pandemic-era crisis living and investing.

In 2017, Janet Yellen, as the Chair of the Federal Reserve, told us that there wouldn’t be a financial crisis in our lifetime. I remember vividly the day she said it. My grandma would share an old Polish saying: “Don’t call the wolf out of the woods.” Only three years later, the markets and the economy stalled and fell as COVID gripped the world. Six years later, Ms. Yellen is presiding as the Secretary of Treasury over the era of the biggest bank collapses in recent history.

Crises are part of life and part of investing.

Is all investing crisis investing? No, of course not, but it’s good to be prepared rather than surprised. Sometimes it saves me from a minor inconvenience, other times from a bigger pain to the wallet. I have to thank that first decade of my life for imprinting this mindset into my investor DNA that I can’t make a single decision without knowing what I would do if things didn’t go exactly as planned.

Let’s not call the wolf out of the woods, and let’s have a good contingency plan if the wolf comes, anyway.

 

Happy Investing!

Bogumil Baranowski

Published: 4/11/2023

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (”Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

The stock market trends up over the long run. It’s far from a straight line. You’ll see many ups and downs. The shorter you’ve been investing, the more enthused you get amid a bull market, and the easier you’ll give in to the fear of missing out. The longer you invest, the more downturns you’ll see and the more patient you become. It’s vital not to scare yourself out of the market and rather see investing as a lifelong pursuit. Oscillating between 100% invested and 0% invested is not the path we take. We believe there is a happy middle ground, slow, steady, calm, and collected. Let me explain.

I was listening to William Green’s interview with Jason Zweig. Mr. Green (Author of Richer, Wiser, Happier) interviewed many of the investing legends we know and has a gift for introducing them to us from a different, more intimate perspective. We get to see them as humans, people like us, with emotions, fears, and worries. Mr. Zweig writes for the Wall Street Journal. I was introduced to his writing through his commentary to Benjamin Graham’s Intelligent Investor.

Graham, considered the father of value investing, had significant investment success before the Great Depression in the 1920s. He experienced massive losses in the crash that followed. The entire Dow Jones index dropped over 90% in those few challenging years. Mr. Graham refined his investment philosophy, sharpened his value focus, and did very well, inspiring many that followed him, including the legendary Warren Buffett.

Mr. Zweig mentioned in the interview how Ben Graham exited the market in the 1960s and never really got back. He was worried the Great Depression would happen all over again. It was also the time when Buffett wound down his investment partnership because he found the market unattractive.

Graham had already made his money at that point and didn’t really need to participate in the market. Buffett might have closed one chapter of his investment career, but he was far from being done. He was about to start reinventing and growing Berkshire Hathaway from a textile business to the behemoth that it is now.

That’s a prime example of a student and a master with two different decisions at the same point in time facing the same market realities.

The answer for each investor is very personal and may change over time. Some can feel comfortable being 100% invested at all times and truly embrace the volatility that comes with it. Others would rather have less invested. That decision has all to do with a preference and tolerance for market gyrations, but NOT a short-term response to them.

The challenge here lies in human nature, which is at odds with investment success. We follow Buffett’s motto: “Be fearful when others are greedy and greedy when others are fearful.” If you really take this idea to heart, you will probably be more invested when fear dominates the markets and less invested when greed overtakes investors.

The range here is not 0% to 100%; it may be 80% in stock to 100% in stocks if our preference is to be close to fully invested. If someone prefers a 50:50 split, they may also choose to be 10% lower or higher, depending on the availability of attractive ideas.

The slow and steady mindset matters here, and we’d rather avoid dramatic shifts. In March 2020, I took a lot of calls, not just from my partners, clients, and family, but also from fellow investors. Among that last group, I listened to some very seasoned investors who chose to exit the market completely right at the market low. They sold all because they couldn’t take the uncertainty and didn’t want to endure what may come. It was a dramatic shift from 100% to 0%. They later shared their regrets as the market recovered and headed higher.

In mid-2021, when the markets were flying high. I also took many calls, and I listened. I heard another set of bright seasoned investors that believed that stocks were “too boring” for these “exciting times”, and it’s now the “alternative assets” they are chasing. They also added the US dollar is not thrilling enough. They moved to leveraged, illiquid, non-US, including crypto, and more. That’s another dramatic move when greed rather than reason guided them.

Our exposure to any of those “assets” was zero. We didn’t hesitate for a second. We knew that we don’t own would matter soon enough, and it did. As a bonus, the dollar actually fared very well against what some expected.

After last year’s market volatility and correction, I’m hearing how US treasuries are the place to be. That’s the 100% to 0% shift from one extreme to the other. The fear took the lead again.

It won’t surprise you, my dear reader, that we find a middle ground between all those extremes. We prefer to be invested over the long run. We never go 100% to 0% and back. We do trim when greed dominates the market; we go on a buying spree when fear takes over.

We see investing as a lifelong pursuit, for many of our clients, it’s a multi-generational pursuit. As the world around us goes through a rollercoaster of emotions, as investors bounce from greed to fear and back, the sentiment goes from hot to cold; we keep a steady course.

Happy Investing!

Bogumil Baranowski

Published: 3/30/2023

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

Investing is all about the quality of questions. I’m coming up on two decades of my career. I  have sat down and talked to countless executives from various companies. I have listened and read through more quarterly earnings than I dare to admit. It’s been all in the name of learning. I heard many answers, but it was the questions that stood out to me. I kept collecting them in the process. They proved to be evergreen and continue to help me find the answer that can make or break an investment. Let me explain.

I was part of a snowshoeing adventure this winter. My companions were bright, seasoned investors. We had great conversations and some good laughs. We enjoyed the mountain vistas and were ready to head back to the valley. The ski bus stop appeared ahead of us, where we waited for a bus. The bus proved to be a mini Van. We asked the most obvious question: how many seats do you have? The answer was 7. Our group was larger than that. Some immediately volunteered to take a snowy shortcut on foot and walked off the road.

We got in and started our drive. In a few minutes, we arrived at the next stop. A couple was waiting there, but there was no room for them to join us. They asked a question we didn’t think of asking: “when is the next bus coming?” The driver said 5 minutes. You can imagine the look on our faces. I wondered why nobody in this crowd of professional investors, including me, asked that question!

As professional investors, all we do daily is ask questions, look for an answer, and paint a picture of the world and each investment in that context. When it came to catching a bus, we didn’t deliver. I smiled and started thinking about the quality of the questions we ask. Sometimes it just takes one more question to make it or break it. What is that question? That’s where the true value of a good investor lies.

In the early years, I would sit and listen to the questions others asked. Back in the day, the meetings used to be in a conference room at a nice New York City hotel where a big bank would host an event. I had a scheduled time slot. I would enter the room with 3-5 other analysts or portfolio managers. Everybody had a chance to ask questions. I was curious about the answers to my questions, but as you probably can guess already, I was even more intrigued about what others wanted to know.

There were some extreme moments, too. I was sitting across the table from a CEO of a major company, one of the biggest players in its industry. The rest of the group wanted to figure out the next quarterly earnings and the timing of a recently announced acquisition. They wanted to know how to adjust their elaborate financial models to a penny. I asked about the long-term, and the company was making some big shifts that could improve profitability in the next 3-5 years.

The CEO accommodated the short-term focused questions, but then he turned to me and gave me his full attention. He smiled and appreciated that I cared to know where he was leading the company in the long run over where the earnings will fall in the near term.

I continued to improve the quality of the questions over the years. I also dropped many questions from my repertoire. Right off the bat, I sometimes tell the management that I have no interest in the next quarter’s earnings; I’d like to understand where this company can be in 5 years.

I remember vividly sitting down with a CFO of a mid-sized company with a lot of potential ahead. She quickly answered all the questions about the immediate future, and for those willing to stay longer and listen, she painted a picture of a much bigger and better business ahead. We ended up owning it on a few occasions until, eventually, it got acquired by a bigger competitor.

I wonder when my appreciation for questions started. I don’t think I was an easy student to have. My inquisitive mind wouldn’t let me stay silent for too long. I’d raise my hand and ask away. I remember one course in corporate finance at my French grad school. The professor eventually asked me if I could represent all students in the group to the faculty and give my feedback about the curriculum. I also liked staying until after the class was over. I knew some students had questions they’d only ask when everyone was gone. These were the best questions anyone asked, and usually, only a handful of us was left in the room to hear them.

I gave my TEDx Talk – The Great Investor in You, five years ago. I enjoyed the talk, but the best part was the questions. I stayed behind, and I heard story after story and countless questions for the next two hours. Many of them, I still remember. Many of them gave me a new perspective, though; one might think I was there to give a new perspective to my audience. I like to think it was a win-win for both me and my audience.

I kept that practice throughout my life. I wait for that one more question. I credit it for many opportunities that I seized and pitfalls that I avoided.

As I’m putting the finishing touches on this article, two phenomena are happening. First, hardly any conversation with anyone I know can pass without ChatGPT being brought up. Second, from Larry Summers to Elon Musk, Silicon Valley Bank has been on everyone’s mind in the last few days.

Let me briefly tie both back to the quality of questions and how that one more question can make it or break it.

ChatGPT is an AI-powered tool to get answers, write essays, code, and a lot more. Remember, though, it’s up to us to ask the right questions, and the better the quality of the question, the better the answer can be.

Silicon Valley Bank is a commercial bank headquartered in California. On March 10, 2023, the bank failed after a bank run on its deposits. What’s a bank run? Depositors run to the bank and try to get all their money out. I grew up in Poland, and in the 1990s, we watched bank runs on nightly news often enough to remember to ask a few more questions before depositing money.

Silicon Valley Bank, you’d think it’s just another bank, but if you look closer, it’s the second largest bank failure in U.S. history. Its depositors are VC firms and start-ups. With the downturn in the tech industry, on the one hand, and rising interest rates, on the other, the bank collapsed.

The closer you look, the more interesting the story gets. Many remember the FDIC deposit insurance in the U.S. If the bank fails, $250,000 per customer is covered under the insurance. Now, 85% of the bank’s deposits were uninsured since they exceeded the amount mentioned above.

How do banks navigate around drastic interest rate policies: from an overnight cut to zero three years ago to a quick ramp-up to the highest levels in 15 years last year? It’s not the last question worth asking; there will be more.

Whether you are waiting for a bus, buying a stock, investing in a start-up, or even opening a bank account, the quality of the questions matters, and sometimes it’s just that one more question right when you are almost out the door, that question that can make it or break it.

Happy Investing!

Bogumil Baranowski

Published: 3/14/2023

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

As the news of the implosion of one of the crypto exchanges hit the headlines recently, I have been thinking about how I was completely unaware of who Sam Bankman-Fried is, what FTX does, or anything related. Apparently, this $32 billion venture had the backing of some serious seasoned investors. Its executive was patted on the back by legends of the world of politics and business. Its product was endorsed by star athletes, all while he was giving outsized political contributions. I must have very successfully exercised selective ignorance since I wasn’t abreast of any of it. I honestly don’t think I really missed anything, though. Let me explain.

When I started out in investing, I wanted to know everything. I read every possible book I could find, order, and borrow. Peter Lynch’s “One Up on Wall Street” was the first, but hundreds followed. I read books about Warren Buffett and then Benjamin Graham, the classics, but I also read about traders, speculators, technical analysis, momentum investing, and trend following.

It usually took a single publication on each topic only to retrace my steps and go back to the broadly defined value investing school of thought. Value, not in the sense of buying simply “cheap” stocks, but value as a treasure hunt for deals available at big discounts to their value. I quickly rejected a lot of books and ideas. I unearthed some older publications in my search for the source.

Physical bookstores are a rarity these days, but their “investment and money” aisle contains such a wide variety of topics that it takes a lot of deliberate research to find what’s worth reading and what sells well but might prove to be unhelpful and even disorienting.

The same logic applies to the news. The other day, I looked at the headlines, and Sam Bankman-Fried stories were everywhere, from all angles. Then I used a news source that’s much more filtered, tailored to serious investors, a service we pay for extra, and Sam was in the top 5 headlines as well. The news was no longer flooding the media outlets but clogging them while leaving no room for anything relevant.

For years, we wrote on a few rare occasions that we have no interest in anything crypto. We saw it as yet another bubble of madness and euphoria. We learned that not everything that trades has value. It’s such a powerful statement when you think about it. You can spend $10,000 to buy shares of a major consumer goods company like Colgate-Palmolive, or you can spend it to buy cryptocurrencies. Both are purchases done with real money, but what you have at the end of the transaction is dramatically different.

In the first case, you hold shares, small pieces of a real business with products, employees, manufacturing, marketing, distribution, and, most of all, what we believe is a profit-making company that pays dividends. In the second case, you own nothing of value, a line of code. Its price depends on the second willing buyer.

It was one of the evenings last fall when I received messages from a few friends asking if I was following “the fallout of SBF.” To their great disappointment, I had to ask what SBF was. They said, not what, but who! I’m curious; if it’s something that matters to them, I thought I’d do a little search. I have never heard his name before, and if I have, I must have exercised a very deliberate selective ignorance. I did hear about FTX on one or two occasions before. That’s about it.

You may ask how that is possible. The same as with books, especially investment books, I choose more carefully than ever what I care to know. Last year, we all experienced peak crypto madness, some called it a “crypto onslaught.” I shared with a group of fellow investors last year my experience. I told them that almost everyone in any social interaction would bring up crypto across most ages and a broad range of professional pursuits, from a waiter at a restaurant to a major real estate developer with whom I crossed paths. The last one got all enthused when I said I’m an investor. He insisted on introducing me to his son, who was an avid crypto trader at the time. We even had executives from one of the crypto exchanges rent a room next to us on one of our trips, and we couldn’t help but overhear the constant crypto chatter.

My contrarian reaction was to tune it out completely. I must have gone so far that I almost experienced the Rip Van Winkle moment. This character in Washington Irving’s book falls asleep in the woods and wakes up twenty years later, having missed the American Revolutionary War.

I admit I completely (and gladly!) missed the crypto phenomenon.

Being a successful investor is not about knowing all; it’s about choosing what to know and what to know very well, acting on investment ideas, buying, selling, and even ignoring some takes conviction.

It’s not about being better or worse informed but about a discipline of what you let in and what you leave out of your sphere of attention. Attention is precious and limited and serves us better if it’s not scattered but focused.

We often share that when you look at our investment portfolio, you see not just what we decided to buy but a whole variety of choices we deliberately passed on and will continue to pass on. Crypto remains on our no-go list; hence, my time is better spent elsewhere rather than following the SBF and FTX saga.

Happy Investing!

Bogumil Baranowski

Published: 1/19/2022

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

Amid this year’s market’s ups and downs, a friend asked me if I was watching the daily market news. I said that I was not. The daily media reports often share extreme views, and the more dramatic they are, the more airtime they get. He was intrigued and curious about how I knew what to do then. I said that we rely on our research, which leads to insights with long shelf life. We can’t find those in the daily news. Let me explain.

There is no shortage of information, data points, and opinions. I think that at no point in time could more people easily reach a bigger audience in less time than today. Everyone with a smartphone is a journalist these days. Our attention span has never been shorter. We swipe, click, and refresh our little smartphone screens with every blink of an eye. We have developed cat-like reflexes browsing through thousands of pictures, headlines, and comments instantly.

As disciplined, patient investors, we don’t gain much from this fast-speed news and data flow. We see ourselves more as business owners. We are curious about the long-term direction of the investments we make. What matters to us most are insights with long shelf lives. I came across this term on various occasions. I found it to be the perfect description of what we do.

Suppose you were to place insights on a scale from the short-lived ones, perishable to the ones with very long lives. In that case, I’d start with a momentary stock sell-off in the early hours of the day and end with a business we own establishing a long-lasting leading market share at the other. If you turn on the news, you’ll see a few dozen opinions about a sudden stock price move. It’s exciting and gets the viewers’ attention but adds no value to our process.

It’s fairly easy to discount and ignore the truly short-lived noise; it’s a little harder to get beyond that to longer-lasting insights. The true success lies in distilling the insights with long shelf lives. These insights will be true 5-10-15 years from now or even longer. A big part of the investment news attention is around quarterly earnings. Are they better than expected or worse? The stock prices react on the day the earnings get reported. The price rises or drops, and someone on TV has a comment or two about it.

We follow quarterly earnings, too, but our goal is very different. We focus on recurring insights — big underlying trends. We want to understand if the management is frank with us, do they underpromise and overdeliver or the opposite. We’d rather have them tell us how it is. On calls with management, we always emphasize that we have no interest in quarterly beats or misses; we want to know where the business could be in 5-10-15 years. We basically ask about long shelf life insights. Are we still on course, no matter how much noise a particular quarterly earnings report brings?

The real challenge in analyzing the insights is the change. Even if we find something that was true for a hundred years, change might come and turn our long-lasting insight obsolete and irrelevant. Kodak ruled the world of photography for a century. It was even exploring digital photography before many others, yet it couldn’t preserve its business model and leading market position when the change happened. The film camera disappeared from shelves and pockets forever.

The kind of insights we look for and the kind of tests we put them through are not something you can find in a newsflash report with a few buzzwords with a well-timed commercial that follows. Those are the insights we find looking closer, asking questions, and conducting our own research.

Investors’ interest in long shelf life insights is fading, while the affinity for perishable news flashes has never been higher. This leads to more focus on short-term returns, which takes the attention away from 5-10-15 years, and more toward the next few weeks and months. It’s a peculiar chicken and egg phenomenon. There is no room for long-shelf insights in an investment process focused on monthly returns. The fewer people care to look beyond the next quarterly earnings, the more long-term opportunities there are for investors like us.

 

Happy Investing!

Bogumil Baranowski

Published: 11/9/2022

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

A stock investor friend asked me that recently. There is much more to it than a simple yes or no answer. He wasn’t looking for a simple answer but wanted to spark an interesting conversation. I did my best to answer it, and here is what I said.

I assume the question refers to the US stock market. The S&P 500, a commonly used index that contains 503 stocks of large-cap companies traded on the American stock exchanges, has been down 30%+ in the first half of 2020, up 100% right after, down 25% since then (Source: Bloomberg). So, it’s not 500 stocks in the index, but 503, and these are US-listed companies but not necessarily US headquartered; some operate out of Ireland, Israel, Switzerland, or the Dutch Caribbean. Others might be US headquartered but generate most of their profits outside of the country. To keep it simple, let’s assume it’s the US stock market we have in mind.

When I hear a question, especially one like this one, I wonder how it came about. Anyone asking if the market is wrong hopes to be somehow “right.” It implies they are not exactly happy with the market’s “opinion.” Finally, we may enter the good vs. bad territory. Is it a good or a bad market to invest in, and if so, for whom?

What is the market anyway? We often write that the stock market is an aggregation of buyers and sellers of stocks. The ownership changes, stocks remain what they have always been, participation in real-world businesses. They have products or services; they generate sales and hopefully earn a profit.

Let’s imagine for a minute that the stock market stopped operations tomorrow, and no one could buy or sell shares, but their value would remain unchanged. You’d still hold the same percentage ownership in real business as the day before. There would be no available price quote for a moment. I say a moment because a free market economy can’t tolerate a void of that kind. The minute a buyer and seller appear, a market is reborn again, and a price gets established. The value never ceases to exist; the price might not always be available. Food for thought.

What is the stock market, though? Many have tried to capture the market as a whole and created a variety of indices. They are a peculiar invention. They don’t represent the “whole market”; they don’t even tell you the total market price of all the stocks they contain either. Taken out of context, the index level of 3,000 or 30,000 is relatively meaningless. The Dow Jones Industrial Average is almost 30,000, S&P 500 at 3,600, and Nasdaq at 10,500. Is it good or bad? Right or wrong?

The media might closely follow every downtick and uptick in the market and each stock. Even the “tick,” the smallest possible move in a security price, isn’t set in stone. Only twenty years ago, a minimum tick was 1/16^th of a dollar or 6.25 cents, and it’s a cent today. Larger ticks apparently decrease trading activity and raise trading costs.

Nasdaq’s market price was around $20 trillion last year, S&P 500 $35 trillion, and The Dow Jones Industrial Average $10 trillion (Source: Wikipedia). Indices are created based on a collection of rules. They can be equal-weighted, market capitalization-weighted, the sum of the stock prices, and more. Still, whichever way they are put together, the largest index discussed above, the S&P 500, captures only about 1/3 of the market capitalization of all US publicly traded companies.

Is the market wrong? Are we implying it’s too low or too high, or maybe we are claiming that it’s “moving” in the wrong direction? Which one is right? Which one is wrong? I’m thinking of road traffic here; we seem to fall short of an agreement, too, as some grew up driving on the left, some on the right side of the road.

I’m left-handed; you could say that I’m a born contrarian, and what feels “right” to most literally feels “wrong” to me. It has proven a crucial skill and a helpful mindset in navigating the markets, though. I naturally zig when others zag. I don’t always go against the crowd, but I do prefer to have a different perspective than most.

Is this market wrong, though? The feeling that you are up “against” the market, it’s a lot like being up against the weather. It reminds me of a Scandinavian saying that there is no bad weather, just bad clothing. If it’s cold outside, you dress for it. If it’s warm, you do the opposite. If it’s a high-rising, overheated market, we act differently than when it’s a beaten-down, cooler market. In the first one, we trim, sell, and wait; in the latter, we are likely slowly or not so slowly buying up stocks.

Mr. Market allegory created by Benjamin Graham (the father of value investing, the legendary investor, and the author) sums it up best, though. He described Mr. Market as a fickle investor who goes from being pessimistic to optimistic. One day Mr. Market is desperate to sell stocks at very low prices; another day eager to buy at very high prices. Mr. Market won’t make us do anything, call us right or wrong. Mr. Market has a price to offer, and it’s up to us to decide whether we like it.

What if the market isn’t right or wrong, good or bad, it just is, and we, investors, have a choice, do we buy, sell or wait? The end goal is to grow the capital at a respectable rate over the long run without taking excessive risks. We can let Mr. Market work for us, not against us, and leave the judgments to others.

 

Happy Investing!

Bogumil Baranowski

Published: 10/25/2022

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

When the market takes a seemingly unexpected turn in either direction, we often get familiar phone calls from clients. They tell us: “We know what you are doing (whether it’s buying, selling, or waiting at the time); we just wanted to hear your voice and wish you good luck.” There are no surprises; we value consistency in what we do, and so do our clients. Let me explain.

Consistency doesn’t mean to us the same returns year after year. Consistency means “steady adherence to principles, patterns of action.”

In our writing and conversations, you might have noticed certain unchanged principles. They are set in stone. The markets go up and down, policies change and shift, and corporate earnings rise and fall, but the underlying philosophy behind our investment style and business practice remains the same. That’s what gives us and our clients peace of mind.

The actual makeup of the portfolios will evolve and change to represent the best investment opportunities we see at a given time. Our stock selection, research process, and buying policy remain the same. We look for quality businesses with promising prospects that we can buy at attractive prices.

Over the decades, the list consisted of companies with tangible products like car parts, coffee makers, or candy to intangible ones selling software solutions to individuals and businesses, allowing them to communicate, work, find entertainment, and more.

We never limit our investment universe to any particular industry, and there have been just a few industries we chose to avoid deliberately. Still, if an opportunity arises and our research can back it, we are happy to pursue it.

Our consistency relies on a very disciplined, thoughtful investment approach that allows us to avoid the fads of the day. It is easier said than done, though. We do our best to be open-minded and optimistic yet rational. With every new initial public offering, we take a look and give new companies a chance. We might not buy them the day they are first listed, but if they are unique and promising, we’ll keep an eye on them until the price is right.

We are happy to correct our earlier assumptions, too. Needless to say, everything from bicycles, electricity, cars, laptops, and more were once considered short-lived fads, yet they proved to be a permanent fixture of our lives. We don’t want to miss out on less obvious opportunities, either. For us, the best telltale is profitability. A venture with no path to profitability is of no interest to us as investors and shareholders.

Bull markets and bear markets are part of every investor’s life. Late bull markets are times when many fail to talk themselves out of buying overpriced stocks that regularly drop the most not long after. We usually don’t have much difficulty waiting on the sidelines and letting market silliness unravel. In a bear market, many fail to talk themselves into buying even when prices are low. Here, we act gradually and decisively and start buying when stocks look attractive.

Investing is something we do day in and day out. Even if we are not actively buying and selling, we are reading, researching, testing our assumptions, and preparing for opportunities ahead. Our clients make money not when we buy and sell but when what we hold grows in value. It happens in three possible ways: a small business becomes bigger, a temporarily troubled business recovers and undervalued stocks become fairly valued. Ideally, we’d like to see all three occur together; that’s where the upside can be the biggest.

We also sell our holdings now and then, and we are equally consistent on that front, too. I’m often reminded how little attention investors give to a healthy selling discipline. It pays off both in bull and bear markets when hard choices must be made. It’s no different than a gardener weeding the garden. It’s an essential part of the process.

When the markets hit speed bumps at times, we appreciate that our clients already know what to expect. They know what we are looking for, researching, and possibly even buying when almost everyone else freezes and panics.

Investing is a challenging yet exciting and rewarding journey; the principles we follow tell us what, how, and when to do. That consistency allows us to keep a steady course no matter what the markets send our way. We are always ready, and you know where we stand.

Happy Investing!

Bogumil Baranowski

Published: 10/13/2022

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

What’s the best time to start investing? The best time is always now.

Sitting under a tree this summer, hiding from the heat of the sun, you might have thought about the best time to plant a tree. Or, like I did, quietly said thank you to whoever planted it decades or centuries ago. A Chinese proverb tells us that the best time to plant a tree was twenty years ago, and the second best is now. Investing is the same.

We have seen big market rallies and significant corrections in the last two and half years. We saw interest rates fall to zero and quickly rise again. We saw demand for many goods and services evaporate, then come back with great force and look for a new normal more recently.

It’s no wonder we got asked more often than usual if it’s a good time to invest. We love that question!

We see investing as a lifelong pursuit and, in the case of many of our clients, a multigenerational pursuit. Not unlike planting and growing trees! Whether you invest on your own or with the help and guidance of a professional, it’s important to see investing as something one can do a year in and year out.

It’s true that in some years, potential new investments look more compelling than in other years, but showing up every day and looking is the only way to find out what to buy and when to buy.

When we buy stocks, we intend to hold them for a long time, ideally forever, if possible. That’s similar to planting a fruit-bearing tree. I’m thinking of olive trees that can live for hundreds or even thousands of years and bear fruit for most of their life.

Investing isn’t just buying and selling stocks or bonds; it’s also tending to current investments. We spent a good amount of time watching what we hold. Again, not unlike a good gardener. Not all investments prove to be as long-lasting and productive as olive trees, and we need to part with them sooner.

With stocks, it doesn’t pay to be too quick to judge. Some investments may take a while to start to perform and make a positive contribution to the portfolios. Again, it’s not that different from a fruit-bearing tree that may take years until the first harvest and even longer for the best harvest.

At the same time, in investing, the first price move up may invite anxious holders to start selling prematurely. We prefer to wait and take our time as even bigger gains may be ahead. Patience is very hard to practice when investing, but the payoff makes it all worth it in the end.

The outcomes aren’t often linear or regular. A stock that hasn’t moved in a while may start its sudden ascend out of the blue. It’s rare to see a clear upward trending line in investing; leaps and bounds are more likely.

There is a certain discomfort included in this lifelong pursuit. The best opportunities appear when others panic. These might prove to be the most difficult times for anyone to consider buying stocks, yet given the lower prices, it might be the best time. On the other hand, the worst investments can be made when others succumb to euphoria. Again, these might be hard moments that will test the most disciplined investors.

What’s most important, though, is to see investing not as something you do now and then, when it’s easy and pleasant, it’s rather a permanent ongoing activity, a choice.

Anyone who follows our frequently mentioned mantra: earn, save, invest, eventually realizes that once idle capital accumulates, it’s worth putting it to work. That’s what investing really is – making your money work for you.

Sudden wealth through inheritance or a liquidity event can thrust an individual or a family into the world of investing with little preparation but not much choice to opt out.

As a civilization, we have a longer history planting trees than buying stocks, but the principles are the same. Next time you are enjoying the shade of an old tree, think of investing and remember that the best time to start is now.

Happy Investing!

Bogumil Baranowski

Published: 9/27/2022

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

Never a dull moment — that’s the best way to describe the last two and half years in public equity investing. We’ve had a flavor of a late bull market (early 2020), a panicked pandemic sell-off (spring 2020), a quick market recovery (2020-21), followed by yet another correction (late 2021 to summer 2022).

It feels like a very long journey, yet in some ways, we are exactly where we started. Interest rates, 10-year treasury rate, and unemployment rate are all back to pre-pandemic levels; many stocks erased the pandemic gains, too.

S&P 500 and Nasdaq in mid-June were a mere 10% above the pre-pandemic early 2020 high, while the Dow Jones was almost exactly where it was 2.5 years ago (Source: Bloomberg).

As much as in 2021, we saw many stocks trade close to their multi-year highs, today in mid-2022, it’s not the case. Some securities rose year-to-date; some came under pressure, while others experienced a big 80-95% drop. Volatility returned to the market and produced what we found to be a refreshing variety of outcomes for stocks.

There are many more potential investment ideas worth considering than in two and a half years.

Inflation

Some statistics may suggest that the last 2.5 years didn’t happen, but one metric stands out. It is definitely not where we are used to seeing it – inflation. US Bureau of Labor Statistics reported that the US inflation rate reached 9.1% in June, the highest read in 40 years (November 1981). It was driven by energy, which rose 40% y/y, but food alone increased 10% as well. All items less food and energy were up a little under 6%.

Inflation might be more difficult for weaker, low-margin businesses, where costs represent a higher portion of sales; these are businesses we tend to avoid. All in all, inflation is a tidal wave that affects everyone, consumers, businesses, and governments. If left unchecked, it can be a very disruptive force.

It’s no surprise that the Federal Reserve and other central banks around the globe finally took notice and started raising rates.

Monetary easing and fiscal help of the last two years propped up the demand but didn’t do much for the supply constraints – some long-term in nature, some caused by pandemic dislocations. We believe higher rates should eventually be able to curtail demand to match up with supply and ease the inflationary pressures.

We also witnessed foreign exchange shifts with the dollar strengthening against the euro (reaching parity for the first time in twenty years), the pound, the yen, and emerging market currencies, with Turkey and Argentina dropping the most. This has further implications, especially for countries relying on imports and dollar-denominated debt.

Why is the dollar the strongest in a generation? There might be many reasons: 1) The US is in better shape than other parts of the world 2) the dollar, which is one side of 90% of foreign exchange transactions globally, is considered a safe haven in uncertain times 3) the Fed has been moving aggressively with interest rate hikes compared to other big, developed economies.

The stronger dollar might be a mixed blessing for US companies, especially those with big international sales.

More opportunities ahead

We have been browsing and researching closely more stocks than we have in a while. Among the growing group of stocks whose prices are almost exactly where they were 2.5 years ago, we see bigger, better businesses than before Covid. Those companies, though, trade at the lowest valuations we have seen in years or ever. We get a lot more, but we pay a lot less. It doesn’t mean they won’t get any cheaper, but it means there are many more stocks worth considering than 6-12-18 months ago. There is definitely more to look at and consider, even if we proceed slowly.

Two tech worlds

The previous darlings of the market, many of them broadly defined tech stocks, got divided into very distinct groups. The first consists of large, more mature, established, and profitable companies, and the other are newer, formerly exciting, but still unproven, and money-losing growth stories. If Facebook (or Meta) could represent the former, Peloton or Carvana could be a proxy for the latter. Both groups came under pressure, but the first dropped in price by some 35% on average, the latter closer to 80-95%.

Looking for a new normal

Beyond the ups and downs, it seems that everyone is looking for a new normal. Supply and demand have been out of whack at both extremes. There was the moment we had all the supply but no demand – hotel rooms and airplane seats in 2020; later, last year, we also had all demand and limited supply – in homes, cars, and more. Businesses tried to catch up with demand and look for it in new places. Sales and ad spending moved online, and consumers migrated from formerly busy metropolitan downtowns to the suburbs, and even rural areas as sales and services moved online.

How much of what we saw was a permanent shift, and how much was a temporary phenomenon soon to fade away from memory? We are yet to see. Some companies saw record growth, followed by a decline in demand. We saw oil prices at $60 (pre-pandemic), then at $20 in March 2020, and $110 in May 2022. The conflict in Europe further exaggerated the pandemic’s ups and downs.

Long-term Goals

Our long-term goal remains the same for all the assets we manage. We intend to both preserve and grow the capital over time. We seek to double our clients’ wealth every 5-15 years, which translates to a 5-15% annual rate of return over the long run, but we would like to accomplish it without exposing the portfolios to the risk of a permanent loss of capital. Of course, performance cannot be guaranteed, and past performance is not indicative of future results.

Our strategy can be described as a long-term patient contrarian. All securities are selected through an in-house research process. Our investment horizon for each individual holding is usually 3-5 years.

We intend to hold between 30-60 stocks, mostly US equities, but we may invest in foreign securities as well. We don’t use any leverage; we don’t own any derivatives. We may supplement the strategy with exchange-traded funds (some of them may use leverage or derivatives).

We don’t have a predefined portfolio composition target. We may hold cash at times, but we prefer to own businesses, and when the opportunities abound and prices are right, we will likely be close to fully invested.

What we wrote before applies today: “as much as we pay attention to the overall market trends, we like to look at our performance independently from the benchmark. As long as the businesses we own report improving fundamentals, and the market eventually prices them accordingly, we are happy.”

The Fed and the Market

After two long years of a zero rate policy, the Fed swiftly (four hikes since March) brought the rates back to where they were right before the pandemic. Why not slower, why not earlier? We may continue to wonder; the point is they eventually had to climb higher from a clearly unsustainable pandemic zero level.

As much as we can argue whether low or high rates are better, it’s the speed of change that’s been disorienting for many. More so because they are rising from nothing to something, thus the cost of borrowing can go up many times over very suddenly.

The policy shift is a balancing act between maintaining growth and employment while keeping inflation in check.

Interest rates, or cost of money, is one of many inputs we believe are worth watching while investing. We have found that rising rates are the biggest strain for the most vulnerable, weak companies, which we tend to avoid anyway. That’s not all, though. The higher cost of money seems to create a tidal wave that affects the entire economy and affects businesses, consumers, and governments.

What we have witnessed these last six months is an adjustment, a correction in behavior given the higher cost of borrowing. We think it’s refreshing and might help purge some questionable investment options that have appeared over the last two years. With zero rates, everything goes; with higher rates, there is a natural hurdle rate.

We wouldn’t give rising rates all the credit here, but they did play a role together with slower economic growth and inflation in shifting the investor and consumer sentiment from overly optimistic to definitely much more cautious or even pessimistic.

It’s a backdrop to our individual investment choices, and we don’t let the tail wag the dog here, but we are definitely watching the new direction of the monetary policy (or a resumption of the pre-pandemic trend?), and the reactions to it among both businesses and consumers.

The Market and the Economy

As much as the Fed might be making waves in both the stock market and the economy, we also like to remind ourselves that the market is not the economy, and the economy is not the market. The economy represents all the economic activity; the market represents all the listed public traded companies.

The economy goes through its ups and downs, corporate earnings respond to it, and the stock market attempts to price in both the good and the bad ahead. In some ways, the market tries to predict the future. In March of 2020, the major indices lost about 1/3 of their price (Source: Bloomberg); months later, the economy had a short-term reading of about 1/3 decline year-over-year (Source: Bureau of Economic Analysis). At that point, though, the market was already on the rise.

One could wonder if the stock market is a good leading indicator. It would be too simple if it was. A famous economist, Paul Samuelson, once said: “the stock market had predicted nine out of the last five economic recessions.” He was right about that. The market tends to panic too many times to be a reliable indicator. Those panics, though, offer buying opportunities.

The economy is slowing down after accelerating in late 2020 and 2021. We went from a hard stop (in Q1 2020 US Real GDP dropped 5.1%, and 31.2% in Q2) to full speed (up 33.3% in Q3 2020, and 4-7% the next five quarters) to looking for the new normal (Q1 2022 and Q2 2022 down 1.6% and down 0.9%). (Source: Bureau of Economic Analysis).

It’s been a very wide range of economic growth in those last two and a half years; down 30% and up 30% are clear outliers and remind us of the shocks caused by the pandemic and the policies that followed. The high single-digit growth rate we saw through most of 2021 was also a reflection of elevated demand. It was a matter of time when we might see a regression to the historical average, or a 2-3%, which is what we saw through most of the previous decade.

We are watching the current economic activity with great curiosity and, even more so, corporate earnings. We believe they should give us a better idea of sustainable supply and demand beyond the last two years. As we mentioned earlier, let’s remember that many businesses are coming out of this period a lot bigger, better, and stronger than before, and they have our attention.

What’s ahead?

We believe the US economy is still the biggest, healthiest, and most diversified in the world. Given its depth, size, and liquidity, the US stock market seems to remain the most appealing home for the most innovative, new companies, even if they originated in Europe, Asia, Africa, Australia, or South America. At the same time, US companies are global and benefit from long-term growth and prosperity around the world. They operate under US laws, follow US disclosure requirements, and promote a shareholder-friendly culture, making them appealing investment choices for us. We are optimistic about the US, and the US business, while near-term, we remain cautious about the stock market as a whole. We are happy with our stock portfolio of selected, vetted, well-researched businesses.

What do we expect going forward? We build the portfolio for any possible scenario, and our goal always is to be the least wrong with our investment choices. Given the level of uncertainty from inflation, economic slowdown, interest rates to new policies, and now also, the Ukraine-Russia conflict, we are not surprised to see renewed volatility in the markets, and volatility can be a friend of a disciplined, patient investor.

Performance

In a rising market, everyone wants to be fully invested; in a falling market, everyone hopes to be completely out of the market. We always proceed with caution. We might have lagged in the second half of the 2021 market rally, but our stock selection has paid off so far in 2022. We often say that what we don’t own matters as much as what we do own.

We kept a steady course when we saw FOMO-driven speculative spirits took over the markets last year.

We have been happy with the holdings we bought, and their performance shows that stock selection mostly met or even exceeded our expectations.

We remain optimistic about the long-term growth prospects of the US and the world economy.

The last two and half years have been a whirlwind of euphoria and despair. I think it’s fair to say that we have lived through two decades of economic history in two and half years.

If one can look beyond the noise, we see many companies gain share and get stronger. We saw the adoption rate of technology in work, business, and education take a massive leap. We saw consumers change their behavior and rethink where and how they want to spend time and money.

Slow and steady wins the race remains our mantra as we look ahead toward new investment opportunities.  

 

Happy Investing!

Bogumil Baranowski

Published: 8/18/2022

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

I had an inspiring call with a young investor recently. I’m always open to taking a call with anyone curious about investing. I’m still as passionate about investing as I was two decades ago. If anything, I find more reasons to be. Our call made me think that the stock market no matter how volatile, imperfect, or disturbed it seems; it’s a truly beautiful invention – let me explain.

I enjoy those calls because I get to relive the moment when I picked up my first investing book, and I could never look at stocks the same way. It’s One Up on Wall Street by Peter Lynch. Mr. Lynch shared many ideas in his volume, yet one struck a chord with me the most. He said — stocks are small pieces of businesses. Yes, they have a few letter symbols and prices, but what’s truly exciting about them is the business they represent. I had a few dozen finance professors until then at various universities — they showed me lots of theories, academic research and more. Still, none said what Mr. Lynch said so simply – stocks are small pieces of businesses!

My best guess is that they were painfully burnt by the dot-com bubble, where they likely lost their savings and openly disdained any talk of the stock market in class. It’s a casino where no one can win – that’s what they told me. As a contrarian at heart, you won’t be surprised that this was exactly the field of inquiry I chose.

I loved the idea that anyone can buy shares of any publicly traded company. The stock market doesn’t ask or care who you are – young or old, rich or poor, where you came from, where you are going. I oversimplify here; not all public markets might be open to foreign investors, and there might be some hurdles to clear, but a US investor can buy any US stock with even a small amount of money, and any other investor can do so in their domestic market, and likely in the US market, too. They can thus become a shareholder like any other shareholder all the way to the CEO or founder of such a company. For me, it was an earthshattering discovery then, and it still gets me talking about stocks today!

The moment I buy a share, I become partners with those who started it, if they are still around, and with anyone else around the world who, for one reason or another, believes that this company can do well and wants to be a part of its success. It’s quite a blessing that we get to do that!

The stock market is a place where those shares are traded. It used to be a physical place, where shares were traded in a physical form with trade tickets written and exchanged and share certificates getting moved in boxes from place to place. I visited the New York Stock Exchange on a few occasions, but on my first visit, I saw the last of paper tickets and floor traders – an end of an era. It’s all digital now, but the concept remains the same. Each share still is a small piece of a real business.

In that market, though, anyone is welcome, and people join for various reasons; some want to hold their shares for a day or mere minutes, others for years, and some don’t want ever to sell, and choose to pass them on to the next generation or a favorite charity. The choice is yours.

The time horizon of the participants though splits the stock market enthusiasts into at least two groups: speculators and investors. In my mind, the first one represents those who care more about the price action and less about the underlying business. The latter, the opposite, they are all about the business and have little care or worry about any short-term price action. They know they own something – a profit-making business.

Benjamin Graham, the father of value investing, famously said: “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” As you can guess, the speculators do the voting; the investors do the weighing. I’m under the impression that the market activity is sometimes dominated by the former or the latter, and hence the market as a whole can resemble a voting machine or a weighing machine.

I would add that these are the moments of either extreme euphoria or extreme panic when the speculators take the lead. They seemingly don’t care to know what they hold, or they do know it’s really worthless in the long run; hence their interest and commitment are relatively fleeting. They usually leave as quickly as they came. Investors are the ones that stay. They never really leave. They hold the companies they like for the long run and don’t get easily spooked by market sell-offs. They also equally strongly resist joining any madness at the market top. Slow and steady would be the best way I would describe them.

The market itself continues to impress me, and I’ve been watching it for a quarter of a century and as a professional participant and investor in my own name, and our clients’ names, for almost two decades.

There are times when speculators create an overhyped market in almost anything, including profitless companies without a sustainable business model. These are companies that simply give away $100 bills charging $50 and think that somehow they can pave their path to success with ever bigger losses. Venture capital firms made a bet on them and managed to take them public, where speculators bid them up even higher. It happened last year, and it happened dozens of times before in the history of the market. Remember, though, speculators are not here to stay. All they care about is a rising price. The moment it falls, they run.

Time after time, I have witnessed companies with no real business-to-show-for see their prices rise. Also, time after time, I noticed that the very same market patiently allows speculators to dance away, only to see them panic and sell.

Who is left? Investors. They weigh; they don’t vote. They already knew those companies are worth 5 cents on the dollar at best, possibly zero.

Last year in November, a myriad of companies, from sporting equipment to online car dealerships, and more, with no real, sustainable profit-making businesses, traded at eye-popping valuations. It was the time of fear of missing out; you only live once, suspension of disbelief – anything goes!

Over half a year later, the market spoke again, and those companies finally trade exactly where they should — 90% down or lower. How much is a profitless business with no path to profitably worth? We think, and we know – zero, short of a miracle turnaround; hence, the market gives them 5 or 10 cents on the previous dollar, still just in case something unlikely saves them. Remember, not all speculators ever leave; some haven’t had enough pain and still hold on with hope. I sometimes think that those 95% losers end up at the bottom of someone’s portfolio, and they just forget to sell it, and if they all did it, the stock would be right where it belonged from the beginning – zero.

Looking back at this remarkable half a year, I want to share this Ode to the market. Speculators, inflation, interest rate hikes, talking heads on TV, none of it matters. The market, in the end, plays the same role it did when Ben Graham watched it with great admiration a century ago, devoted his life to his study, and inspired generations of others who followed.

All this to say, the market will do its job despite all the noise and disturbance, and so will we. We look for quality businesses, just as Peter Lynch told us, hold them, and let the speculators come and go. If anything, their rollercoaster ride of emotions allows us to buy stocks at even lower prices and sell them at even higher prices than if the whole market was full of level-headed, calm, and collected investors.

Thank you, Dear Market, and Thank you, Speculators.

 

 

Happy Investing!

Bogumil Baranowski

Published: 8/4/2022

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

We’ve had days and weeks recently when stock prices only pointed downwards. The major US indices fell some 20%-33% from their highs recorded late last year. It’s no surprise that we are all wondering where the bottom could be. Let’s see what we can find out.

When I hear about market indices and averages, I think of a lake I grew up visiting as a kid with my cousins. Our grandpa would warn us at times. He’d say that one can drown even in a lake only inches deep on average. He said so because that particular lake had seemingly never-ending vast ankle-deep shallows, but then there was an old river valley in the middle. It had steep walls and dropped to 20 feet or more. As kids, we were curious and found the edge of it many times. The water there was cold, and you could feel the current that could take you out to the middle of the lake like a feather.

On average, it might have been a shallow lake, but it was not the complete picture. The same the markets might go up or down at times, but it hardly ever is all we should know.

The indices can comprise anything from 30 to thousands of stocks. They are constructed in various ways, and their composition is subject to change. They are manmade, not god-given. Their daily price and movement may give some idea of the market’s general direction, but it’s an imperfect picture.

As you remember, we don’t manage our portfolios to any particular index. We prefer to hold 30-60 well-selected companies, each with its own specific story. They are not immune to market gyrations, but given that they tend to have strong balance sheets and sustainable earnings power, they usually march to their own beat. They might fall behind when the broad market rises quickly, but they may hold their ground better when the market drops. They are slow and steady rather than fast and furious.

The fast and furious stocks drove the markets higher in 2020-2021. Many had little profit to show for. Their valuations expanded, and their stock prices reached what we thought were eye-popping levels. They seemed to promise growth beyond anyone’s imagination. These are tales we heard before, and we had our suspicions that eventually, the reversal to the mean will bring them back in line and closer to reality – Has that happened already?

The Profitless Tech UBS stock basket dropped from 100 to 60 in March 2020; then it rose to 220 by early 2021; it hovered at 200 through most of 2021, only to take a nosedive back to 60 most recently, a 72% drop. It looks like a big air bubble that inflated and burst right after, only to be back to square one.

UBS Profitless Tech

Source: UBS Profitless Tech

Another way to look at the fast and furious stocks of the last two years would be the valuation. The chart below shows a group of internet stocks that enjoyed what we thought was an incredible boost. The market was willing to pay 2x-4x as much for each dollar of their earnings as in previous years (see chart below). It felt to us like a paradigm shift. Somehow any previous models and assumptions seemed to not apply anymore, and those stocks deserved a much higher valuation. That bubble burst as well.

Source: Altimeter.

Is all the air out? In some pockets of the market, maybe, but then looking at other hyped-up “assets” of the last two years, we might think there is more air to let out.

Out of curiosity, we looked at the total value of cryptocurrencies. These new assets with no profits, no revenue, and not much to show for other than a digital record also enjoyed a heyday. The tracked value of all cryptocurrencies touched $3 trillion last year. That’s a ten-fold increase from the levels recorded in the prior years. $2 trillion of that value vanished already, with little under one trillion remaining. Some reversed their stance and argued that now cryptocurrencies are worth zero, if they are right, then that bubble hasn’t burst completely yet.

We often say that what we don’t own matters as much as what we do own, especially in a bear market. We had no interest in cryptocurrencies and no interest in profitless technology companies either. We still don’t.

Where is the bottom? If the biggest critics of cryptocurrencies are right and they are indeed worthless assets, the bottom is a trillion dollars away; they are 2/3 of the way there. For profitless tech and internet stocks, we reached a bottom that those stocks reached before both in prices and valuations (see earlier charts). Is it THE bottom? We are yet to see.

There might be more air left in various market segments; there might be more market volatility all around as businesses, consumers and governments learn to operate with higher inflation, rising interest rates, and economic slowdown or a recession.

As much as tech stocks led this market correction, there are big swaths of the market that held up just fine. A good proxy for them could be a high dividend yield index or ETF (exchange trade fund) that track quality businesses with dividend income. Those stocks have been rangebound and seemingly barely moved since May 2021. Looking at their YTD performance, they are still down, but only some 9%, which is much less than any previously hot flying stocks.

High Dividend Yielding Stocks

Source: Bloomberg, Vanguard High Dividend Yield / FTSE High Dividend Yield.

We look for clues in the earnings release, not daily price actions. We worry less about earnings beats or misses in a particular quarter. We are more focused on long-term sustainable growth and profits.

We never knew where the bottom of the lake was as kids, we might not know exactly where the bottom of the market is today, but we are very encouraged to see renewed skepticism among investors. We think it’s a healthy break from last year’s euphoria and sell-offs create buying opportunities for patient and disciplined investors. As we wait and search for the bottom, we expect to find plenty of new holdings among stocks that are being thrown out like the proverbial baby with the bathwater. They could make a very respectable contribution to our portfolios’ performance in the next few years. We proceed slowly and gradually, though, as always.

Happy Investing!

Bogumil Baranowski

Published: 6/15/2022

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

UBS Profitless Tech basket tracks the performance of emerging high-growth tech and tech-enabled companies which have yet to complete a full year with positive earnings. The basket has been optimized for liquidity with initial weights capped at 4%. Created on May 18, 2020 – rebalanced and reconstituted annually.

Vanguard High Dividend Yield ETF tracks the FTSE High Dividend Yield Index. The index selects high-dividend-paying US companies, excluding REITS, and weights them by market cap.

Have you ever used those old-school hot and cold faucets? Some older hotels may still have separate faucets, one with scorching hot water and the other with bone-chilling cold water. If you burn your fingers in one, you can at least cool them down in the other. A happy middle would be preferable, but it’s not always available. The stock market sentiment seems to have only two options, too: hot or cold, and rarely something in between. Let me explain.

Time after time, it’s fascinating to watch how the market sentiment swings from despair to euphoria and back. The last two years took investors on a real rollercoaster ride of emotions. In February 2020, I attended a conference in Florida. Companies presenting shared their peak results and looked forward to even better results ahead. Coronavirus was a distant problem far away on the other side of the globe. The bottom seemed to have fallen out only a month later, and the stock market took a 32% dive.

Doom and gloom forecasters took the stage on TV, spreading chilling predictions. The market started to recover, though. The S&P 500 rose as high as 40% above the pre-pandemic high. A very impressive feat as the world worked its way out of lockdowns and stay-at-home orders. The market euphoria fed on the consumer excitement or vice versa. Many shopped for anything from grills and pool equipment to new cars and houses. It felt like a now or never moment for both investors and buyers. We heard the mantra: you only live once, and the fear of missing out overtook many.

Quality stocks rose, but also companies with no profits or hardly any revenue. If that wasn’t enough, digital assets with neither profits nor revenue rose in price, including cryptocurrencies and NFTs (non-fungible tokens). Some of them represented as little as funny digital images of a colorful roll of toilet paper. One could find it amusing since that household staple in its physical form became quite a hot commodity in the middle of the pandemic. There was no cloud in sight, and the market reached new highs getting hotter by the minute. Yet something stopped again.

Benjamin Graham, the father of value investing, wrote about Mr. Market. This imaginary character resembles a manic depressive with extreme mood swings wanting to buy or sell. Sometimes he is optimistic, other times pessimistic, switching from hot to cold and back at a moment’s notice. Benjamin Graham explained how Mr. Market might be knocking on our door with an offer, it could be high or low, but it’s up to us to decide when and how we act on it.

The last six months might have felt like a cooling period. Stocks fell from their highs, especially those with extremely high valuations and little or no profit. Then digital assets experienced more cold shoulder treatment from earlier enthused investors. We saw some collapses and crashes in crypto markets.

It may all seem disorienting and disturbing, but all noise and temperature swings aside, what drives stock prices, in the long run, is the underlying value. The value comes from the earnings power of a business. How much money is left after all costs are covered – the profit. Outside the stock exchange, if you were to buy a business, a pizza restaurant, or local cleaners, you would look at the last five years of profit history. You’d want to know if those profits are sustainable or if they are growing. You’d be curious to know if the customer base is fairly loyal, too. Finally, the cost structure would be equally interesting to understand. What does it cost to run this business?

The daily, weekly, or even monthly price gyrations aside, the stock market follows the same logic as purchasing local cleaners. We remind ourselves of that every time an overheated market reaches new highs or an overchilled market drops to new lows. The fundamentals, the profits are all that matter.

Those fundamentals are somewhere in between the two extremes; Mr. Market might be jumping up and down, but it’s up to us to decide how and when we act on it. There are times to sell, raise cash, wait, and there are times to buy and put more capital to work. We don’t have to precisely call the markets’ tops and bottoms. We don’t believe anyone can do it. We can do what’s second best, and gradually sell toward the top and gradually buy toward the bottom while carefully watching the fundamentals rather than daily prices.

That’s exactly what we have been doing for the last two years and the previous decades. We believe that slow and steady wins the race. Mr. Market used to go from hot to cold a hundred years ago when Benjamin Graham sat in his Manhattan office, and it does today.

Graham famously wrote: “Business conditions may change, corporations and securities may change, and financial institutions and regulations may change, human nature remains essentially the same.” This was true back in 1922 when railroad era companies like American Locomotive (the leader in steam engines on wheels) still belonged to the Dow Jones Average, and it is today with Apple Inc. (one of the leaders in smartphones) in the index.

Hot or cold, optimistic or pessimistic, euphoria or despair, we keep a steady course, and we hear Graham’s words: “Investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”

 

Happy Investing!

Bogumil Baranowski

Published: 5/25/2022

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

I walked into a snake pit. It was among the more memorable moments of the last two years. On one of our early pandemic hikes in the Appalachian Mountains, my wife Megan and I found six rattlesnakes basking in the sun. They blended in so well, and we were blinded by the sun. Despite that, it only took my brain an instant to register a snake-looking shape, and my body froze, my heart started pounding, and my breathing sped up. It was a true fight or flight, a life or death moment. A million years of evolutionary conditioning jolted me away from imminent danger into safety. It’s part of our nature. Yet, in investing, we have to go against our nature and deeply ingrained instincts, time after time. Why is that? Let me explain.

Investing is a fascinating yet peculiar pursuit. When our gut tells us to hide, the best buying opportunities likely abound. When the fear of missing out overtakes us, and we feel that we should chase a hot stock at any price, it might be the time to wait and pass. As the stock market resumed a rollercoaster ride in the last few months, it’s a good moment to revisit our instincts and see where they serve us and when they can get us in trouble.

For those investors who gave in to their instincts, it’s been a very trying time. Those who panicked and sold all in March 2020 missed out on one of the fastest market recoveries. Others who surrendered to the fear of missing out and bought the hottest stocks in November 2021 saw dramatic losses in the next six months.

Whenever I’m in a forest, I often think about how I am here today because of my countless ancestors that jumped and ran when they saw a threatening shape in the bushes. It’s a natural response in moments of imminent danger.

In investing, though, that eternal logic is flipped on its head and confuses many repeatedly. Let’s explore it a bit more.

How do you think one can make money owning stocks? We want to buy them low and sell them high while we potentially collect dividends in between.

Our nature would make us sell at the bottom, though, and buy at the top — the exact opposite. Selling at the bottom resembles running away from the noise in the bushes; we do it out of fear. Buying at the top may feel like joining a happy celebration that you don’t want to miss out on. This kind of buying and selling happens in the elusive comfort of the crowd, with others right by your side, which is also an environment in which we usually feel safe. It’s all appropriate behavior almost everywhere, but in stock investing.

Why would a good, healthy, growing businesses ever sell at a low, attractive price? Most often than not, it actually trades at a full price or happens to be overpriced.

The best buying opportunities arise when investors panic and sell. They react as I did to a snake pit. They jump and leap in the opposite direction. The crowd runs one way, yet a handful of calm, collected, disciplined, and deliberate investors quietly buy.

Not every falling stock is an opportunity; it would be too easy! Only sometimes can some of them be promising buy candidates for discerning stock pickers. It’s that very time when we go against our nature, and thus, against the crowd, we make the biggest strides in our investing pursuits.

In times of enthusiasm and euphoria, we let the crowd run wild while we quietly step aside and wait. Not giving in to the fear of missing out when others happily bid up stocks to unreal levels is indispensable in successful stock investing.

Needless to say that some of our everyday responses to our primal instincts might be disproportionate anyway. When somebody cuts us off on the highway, when an ATM swallows our card, when we miss a plane, our brain and body respond as if it was a fight or flight moment, but it usually isn’t. It’s a healthy revelation that it’s not all a life or death experience.

Even more so in investing, though, it’s helpful to pause, catch a deep breath, and give it some serious thought. It helps to realize that we might need to go against our nature and the crowd, override our instincts, and do exactly what Warren Buffett suggests: “Be fearful when others are greedy. Be greedy when others are fearful.”

And when we go on a hike in the woods, we still watch where we step.

 

Happy Investing!

Bogumil Baranowski

Published: 5/18/2022

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

I was on a video call last week. We were using someone’s else link, and 40 minutes into our conversation, we were cut off. My host realized that his free video calling plan only allows limited use per call. I know he upgraded to a paid plan since, but that experience reminded me of a more significant phenomenon. We are quickly learning the true cost of many services we use, and it has important consequences for how we invest. Let me explain.

As investors, we have an opportunity to get to know many businesses all around us, especially if they are already publicly traded. I’m often positively surprised by the extent of disclosure of public companies. I imagine few people have the time, the interest, or the need to read it, but if you are serious about your investments, there is plenty to learn.

One phenomenon that we observed over the last ten or maybe even twenty years is the birth of freebies in the internet world. We all know well the free samples we can get at a local supermarket, anything from gourmet cheese to a slice of fresh fruit. The internet changed a lot how we can access a variety of services. The cost to add an incremental user dropped substantially.

The funding coming from venture capital firms allowed many companies to enjoy a large audience without charging a dollar for the service provided. It was all done in the name of fast growth and with the hopes of reaching scale, adoption rate, or stickiness that will allow the company to start charging something down the road. With expanding services and user base, the costs usually run up, while insufficient revenue makes turning a substantial profit difficult.

With the proliferation of smartphones, we saw an even bigger growth in the number of services we use. There are apps for almost anything from cooking to dating, banking, communication, and more. We have seen many specialized professional apps helping doctors, engineers, lawyers, investment professionals, etc.

As consumers, we got used to getting almost everything for free. We don’t feel like paying for our email, messenger, online searches, weather reports, news, entertainment and more. In some cases, companies discovered a workaround. They reinvented an old solution used by media companies before, from newspapers to radio and television. The service might seem free, but it’s the consumers’ attention that’s auctioned off to the highest bidder and sold as advertising space. This path proved highly profitable for a handful of tech giants.

Not everyone successfully followed, and many others try to charge for premium services and introduce many levels of service, enticing users to pay up. Researching many companies in that space as potential investment targets, we noticed how difficult it could be to introduce a paid service. It’s even a more significant challenge to pass through price increases to existing paying customers.

The other troubled model we observed included offering proverbial $100 bills for $50. With flawed unit economics, no matter how big and how fast a business grows, there is no path to profitability. We saw challenges at some meal kit companies that shipped ready-to-use ingredients to our homes. As consumers, we took advantage of those offerings; as investors, we stood away. There was also a real estate company disguised as a tech unicorn locking in overpriced long-term leases only to turn around and rent back office space with no commitment and at a usually much lower price.

With billions of VC funding, a lot of magic is possible for a brief period of time. The start-up founders have been praised for growth at any cost, and consumers were enticed to believe that we can get not only free lunch but also a free ride, free office, free music, and more. Some investors might lose sight of what’s real with all the smoke and mirrors.

Something has changed recently, though. It might have overlapped with the pandemic shifts in consumer behavior. We think it probably accelerated a change that was bound to happen eventually anyway.

Among the winning companies, we witnessed big leaps in the adoption rates of a variety of online services, from streaming to video calling and more. The importance and relevance of those offerings in the eyes of consumers must have changed as well. How do we know? We saw several service price increases in the last two years.

Some might argue that this renewed pricing power comes under the guise of general inflation. Everything is more expensive, so it’s easier to accept price increases for our favorite streaming service or work essential video calling app.

Maybe it’s the inflationary environment; maybe it’s the scale, the importance, the adoption rate. Perhaps it’s all of the above. In the end, it’s the result that matters, and we are seeing how customers are starting to embrace what we like to call the true cost of things. They might be reluctant to pay or pay up – old habits die hard. Still, with this new phenomenon, some companies finally have a chance to enjoy higher revenues and improved profitability.

Others might have failed the test and will fade away or need to change course dramatically. Venture capital firms grew again a bit more reluctant to fund growth at any cost — as they do every so often.

From an investment perspective, we see the potential for improved earnings and real, sustainable upside in many current and future businesses that offer valued services and discover a lasting pricing power. We are keeping an eye on them, and we intend to seize all opportunities that may arise as consumers reluctantly discover the true cost of things.

 

Happy Investing!

Bogumil Baranowski

Published: 4/28/2022

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

It was 2010, and I was sitting at an IPO (initial public offering) lunch in Manhattan shortly after the 2008-2009 financial crisis. This was one of the companies going public soon after a dry spell of the previous two years. It had a big market share, highly profitable business, a strong balance sheet, a growth story to share, and most of all, a very reasonable valuation. You’d think it was a stockpicker’s dream. The interest was tepid at best, though. Investors seemed to have lost all their earlier appetite for risk and… returns for that matter. Reminiscing about that IPO, and looking at the last two years, and especially the abrupt year-to-date investor hesitation both in public and private markets, I started thinking about the ups and downs of the infamous – appetite for risk. What is it? Why does it matter?  

Here at Sicart Associates, we have a habit of following some more interesting IPOs, and we’ve had a record number of them in the last two years. We always have a great appetite for returns but no appetite and rather limited tolerance for risk, especially unnecessary risk. We know well that there is no such thing as free lunch in investing, though. There is a level of risk we are willing to accept, but only if the returns more than compensate us for it.

IPOs are usually younger companies that became big enough and hopefully mature enough to have their shares offered to the general public. As a matter of fact, almost all companies we have bought year-to-date weren’t even public at the time of the earlier mentioned IPO lunch. They have all grown to become well-established leaders in their respective industries. The recent investors’ risk aversion offered some compelling buying opportunities for us.

In our opinion, some IPOs may be too expensive or not compelling enough at first. Down the road, when the enthusiasm fades, price comes down to earth, and the business solidifies, they may become investable from our perspective. We take the time to get to know them, and we wait for an opportunity to buy them. It’s not rare to see a once-hot IPO trade at half the price or a fraction of the valuation only a few short years after its initial listing.

That particular 2010 post-financial crisis IPO caught our attention. We ended up owning it later on. After a bit of a rollercoaster ride, it got acquired at a large premium by one of the major players in the industry. They were willing to pay almost ten times the price the company was listed at only eight years later — was the appetite for risk back up again?

What was striking about that IPO lunch was the difficulty faced by a quality business finding interest among public investors only two years after the 2007 hot IPO market. It was also only a decade after the dot-com bubble when a company didn’t need to have an actual business or a dollar of sales and could still fetch a multi-billion dollar valuation. The appetite for risk tends to go from hot to cold and back.

In May 2007, CNN reported, “Risk abounds in hot IPO market.” Thirty companies a month would get listed at the time. Levels of debt and profitability were secondary. The bull market was strong. House flipping was a quick path to riches. The appetite for risk was high.

If we were to compare 1999 with 2007, the former seemed to have reached an even higher level of risk appetite. Interest rates were cut, and the capital gain tax was reduced – talking about pouring gasoline on the fire. The Internet browser was invented, and the dot-com bubble was getting hotter and hotter. It was the era of price-per-eye ball valuations and massive growth in the use of the Internet. Lycos, a web search engine and portal, was the fastest company to go from inception to IPO (2 short years) and reached a $12 billion valuation in 2000, only to sell for $36 million ten years later. Sales and profits didn’t matter, and the life of dot-com companies was measured by its burn rate. In other words, how quickly the company will burn through the capital, it raised. That money went to Super Bowl ads, high-end office chairs, and more.

Nasdaq Composite rose 400% between 1995 and 2000, only to fall 78% in the next two years. Overnight, the epitome of risk appetite — venture capital became no longer available, and only a handful of dot-com stocks with more conservative management and credible businesses survived, among them Amazon.com.

It’s worth noting that Amazon survived, but still, its price dropped some 90%. Jeff Bezos, at the time, opened his annual letter to shareholders with a single yet powerful word: “OUCH!” One of my grad school finance professors must have been among those who lost their shirts buying Amazon shares at the peak because we never heard the end of his criticism of this online everything shop.

There were other heavily bruised dot-com survivors. Priceline lost a digit and fell from $94 to $4, only to rise from the ashes and become a big player in the online travel world as Booking.com in the following two decades.

Now, the Internet changed the way we live, work, do business, educate, inform, communicate, and even meet future spouses – there is no doubt about it. So many new opportunities, efficiencies, and connections became possible, but also so many businesses became less relevant, shrunk, and had to reposition or vanish.

Innovation has been changing the world from the invention of the wheel to railroads, phones, cars, radios, computers, the Internet, and more. When investing in innovation gets disconnected from fundamentals and disciplined investment process, it may prove to be an all-risk, and no return or all loss proposition, though.

One could argue that the dot-com and 2007 IPO participants were rational buyers, speculators rather than investors. Someone explained to me once the housing bubble era rationale, which may as well apply to any bubble-era speculation. Those flipping homes had a thirty-day investment horizon. They wanted to sell the property higher before the first mortgage payment was due. Similarly, some or many IPO buyers in the bubble era days might have wished they  got in and got out quickly enough to book a profit and avoid the downfall.

It reminds me of a hot potato game, where players toss an object around while the music is playing, and whoever holds it when the music stops losses.

History shows that the music usually stops when the proverbial appetite for risk peaks. It’s impossible to tell at the time but easier to pinpoint looking back.

The “hot potato” speculators sleep with a thumb on the “sale” button. We do the exact opposite. We say that we’d be happy to hold what we own even if the stock exchange choose to close for a few months or years.

The last two years of pandemic investing have been ones for the books. We had a big market sell-off, a rally, and a more recent mild correction. With interest rates at zero (only rising lately), lots of fiscal and monetary help, COVID-driven distortions in supply and demand, the appetite for risk flourished on many levels from many hot IPOs (in 2021, there were 2-4 times as many IPOs as in most previous years), meme stocks, to SPACs (special purpose acquisition corporation) to cryptocurrencies, NFTs and more. Some even argued that the pandemic turned more people into thrill-seeking digital speculators looking for excitement in gamified stock trading apps.

When the appetite for risk goes up, investors not only seem to care less about the sales and profits of the investments they buy, but they also are willing to accept less liquidity in their investments. They are willing to lock in the uncertainty for many years, investing in exotic-sounding private deals and adventurous real estate investments. The term “alternative investments” gets thrown around yet again. Suddenly, a whole swath of allegedly new investment assets appears that would otherwise be of no interest to any discerning investor. Talking heads on TV proclaim the rising appetite for risk among investors.

It’s impossible to tell what the rest of 2022 will look like. What we do know for sure though is that there are always some quality businesses out there joining the ranks of publicly traded stocks. They are offering valued services or goods and figured out a way to turn a profit. They have a long runway ahead of them and a loyal and expanding customer base. The key to success is figuring out the price we are willing to pay and the patience and discipline to hold them long-term.

Warren Buffett once said that it is wise for investors to be “fearful when others are greedy, and greedy when others are fearful.” At times for most investors — no amount of risk and uncertainty is too much to accept; other times, no amount of risk and uncertainty is small enough to stomach.

We like to share that we always have a great appetite for returns but no appetite, and rather limited tolerance for risk, especially unnecessary risk. This investment approach allows us to identify and capture the long-term upside of good businesses and avoid the downfall and pain of highly risky investments. It doesn’t mean we will avoid drawdowns and volatility. We accept it. We know there is no free lunch in investing.

We remember well that the appetite for risk comes and goes leaving behind painful losses for some and buying opportunities for others — slow and steady wins the race.

Happy Investing!

Bogumil Baranowski

Published: 4/6/2022

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

Bob Farrell, the iconic one-time investment strategist at Merrill Lynch, formulated Ten Basic Rules of Investing, which have since become a “must” reference for students of the stock market. One of these pronouncements stated that “Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.”

Recently I resolved to test this observation against my recollection of stock market bottoms I have personally experienced. My partner Bogumil Baranowski, more digitally adept than I, helped with the images in this article. It turns out that while Farrell’s rules constitute a useful warning, they cannot really help anticipate the exact shape of bottoms. Here are a few examples that stick in my mind…

[Please note that, for graphic quality, we have charted weekly prices. This eliminates the drama of the last few days of a bottom, which can be more prominent, especially when declines end in selling climaxes.]

1969-1970: Recession as a Surprise

Source: Bloomberg.

The economic recession of 1970 was relatively mild and affected mostly the domestic sectors of the economy. Still, the stock market reacted rather emotionally, coming as it did after the “roaring 1960s” and at a time when economists and politicians had begun to believe that we had conquered the economic cycle. The V-shaped stock market bottom was relatively clean and responded well to traditional stimuli. The S&P 500 Index recovered to its 1969 high about one and a half years later.

1972-1974: The Double-Bottom Stock Market

This was my first hands-on experience of a bubble blowing up and then bursting. A small number of large, successful companies had weathered the 1970 recession quite well. Many were diversified internationally and exhibited growth characteristics that seemed independent of the traditional U.S. economic cycle. They wound up being labeled the “Nifty Fifty” and were heavily promoted by banks’ wealth departments as one-decision, recession-resistant stocks that investors would never need to sell. As expected, their valuations in terms of price/earnings (P/E) ratios skyrocketed but in time the bubble burst, as they always do. It took the S&P 500 more than four years to match its 1972 high, while several of the Nifty Fifty stocks took much longer to recover. Some never did.

Source: Bloomberg.

After a major adjustment to much lower valuations, the market touched a double bottom in the following September and December. Even the stocks which had not participated in the bubble eventually reached record-low P/E ratios. Meanwhile, the materials-related companies that had been boosted by the first whiff of inflation also came back to earth (together with their earnings) as a result of the subsequent global economic recession.

1980-1982: One Long Recession, but in Two Acts

Source: Bloomberg.

By 1980, inflation had become a growing concern, and early, timid efforts to tame it had threatened to cause a fairly typical but still-mild recession. But in 1979, two situations had occurred that would exacerbate these tendencies. First came the fall of the Shah of Iran, a major oil producer. That incident triggered the second oil shock in recent memory, following upon the 1960 creation of OPEC, and Paul Volcker’s nomination to the chairmanship of the Federal Reserve. Volcker undertook to break the back of exponentially-rising prices – even at the cost of a deep recession.

The second oil shock triggered a capital spending boom in energy-related sectors, which appeared in aggregate economic figures as the beginning of a recovery. However, Volcker’s muscular monetary policies soon threw the economy back onto a recessionary path.

In the 6 months between January and July 1980, the U.S. GDP declined 2.2%. But, after the energy-related growth bump in the 16 months between January 1981 and November 1982, the GDP lost another 2.7%. At the time, it appeared to me as one long recession, during which interest rates reached historic highs, and the stock market’s P/E ratio again touched its historical, single-digit low of late 1974.

My memory of the 1980-1982 decline is one of an excruciating wait that felt like an elongated  U-shaped bottom if one when values were steadily appearing at unhoped-for prices. In the midst of the decline, I sent a letter to our clients entitled: “Happiness is a dull portfolio” – a statement that was vindicated a year later, after the recovery got underway.

1987: A One-Day Bear Market, No Recession but Eventually Everything Suffered

Source: Bloomberg.

Throughout the early months of 1987, the economy gave signs of weakening while stock market valuations became increasingly stretched. I had just launched the Tocqueville fund and was very reluctant to invest the inflow of cash, instead of maintaining significant reserves. After a few months, some shareholders, many of whom I knew personally, began to complain that they were not participating in the ebullient stock market. I finally gave up and invested a significant portion of the liquid reserves.

Then, on what has come to be known as Black Monday (October 19, 1987), the Dow Jones Industrials Average of the stock market lost almost 23% in hours! Nassim Taleb, author of the well-known book The Black Swan (Random House, 2007) had not yet written: “It is far easier to figure out if something is fragile than to predict the occurrence of an event that may harm it.” So most investors were taken by surprise. The wave of selling was such that the “tape” was hours late, and actual stock prices would not be known for many hours, sometimes days. Once final prices were printed, however, it looked like the Fund’s portfolio had held up quite well, and I thought we were geniuses. But with further reflection, another explanation became clear:

When investors must sell in a panic (whether for psychological reasons or because of margin calls if they bought on credit), they sell what they can offload most easily. That usually means the more liquid shares of the larger companies.

Our Fund had been mostly invested in shares of smaller or medium-sized companies, which were below the radars of those panicked investors. As a result, these shares survived the first selling wave quite well. In the following weeks, however, this segment of the market played catch up (or down, rather), and by the end of the year, our Fund had declined almost as much as the stocks making up the index. The market did not recoup its 1987 loss until mid-1989.

2000-2001: The Dot.Comedy

Source: Bloomberg.

The 1990s were a period of intense speculation in the segments of the market linked more or less closely with the nascent Internet. By the end of the decade, companies with a .com suffix, real or implied, with or without earnings, were selling at valuations never before imagined.

We found it be fairly easy to escape the carnage that ensued: the likes of AOL and shares of other companies promising to change the world through the Internet eventually collapsed. Like the Nifty Fifty in the 1970s, they did not reclaim their 2000 highs until several (7, in this case) years later – for those that survived. But, if you resisted the clamor of clients wanting to “participate” and avoided these fanciful investments, your portfolios performed fairly satisfactorily through the entire cycle.

2007-2009: Generalized Junkyard

The advent of what became known as The Great Recession vindicated Hyman Minsky’s hypothesis that “stability breeds instability,” usually through increasing risk acceptance, financial leverage, and speculation.

In the years leading to 2007, real estate speculation had reached new highs, with banks and other financial intermediaries entering into “sub-prime” financing. Some of the less ethical even encouraged mortgage borrowers to lie about their financial condition. By 2008, the speculative bubble and associated Ponzi-like schemes collapsed, causing major bankruptcies and necessitating the bailout of some major financial institutions.

 

Source: Bloomberg.

There had been some scary financial accidents before (for instance, Long -Term Capital Management’s collapse in the late 1990s). However, in my memory, this was the first time that a financial crisis prompted an economic recession that engulfed every sector of the market and the economy into its downward spiral. It may well be the prototype for future crises and recessions.

After recovering to its 2007 high in 6 years, the stock market responded well to monetary and budgetary stimulus in the following decade, up to the early 2020s. But the economic recovery was uneven and hesitant, both domestically and globally.

Geopolitics and De-Globalization

Just as the global economy was beginning to recover from various COVID waves, Russia invaded Ukraine, further aggravating supply chain problems and threatening both an acceleration of inflation and, more recently, a serious economic slowdown.

In the last few decades, financial crises and resulting economic recessions have tended to originate at the periphery of the larger economies. This phenomenon began with the Asian crisis of 1997, which started with the relatively unobserved Thai currency, the bhat.

The globalization trend that has characterized the widespread post-WWII boom has benefitted the world economy by spreading growth to previously under-developed economies and lowering costs (through imports or offshoring) for developed economies. However, in the wake of the Russian invasion of Ukraine and the hardening of U.S. relations with China, it seems probable that this trend will reverse to one degree or another. Most countries will attempt to become more self-sufficient as regards important resources or strategic products. This scenario implies slower growth of the global economy.

Another scenario that concerns me involves the continued strength of the U.S. dollar coupled with a return of U.S. interest rates to more “normal” (higher) levels. On the surface, such a combination may seem counterintuitive. Raising rates to combat an economy’s inflationary tendencies should eventually slow down that economy and raise the specter of recession, which normally should weaken the country’s currency.

However, we live in a complex and paradoxical environment. Financial and currency markets have been unusually volatile, and the U.S. dollar has behaved as a haven currency, continuously edging up in value as many other currencies have tended to weaken. If this trend persists despite an opposite prognosticator consensus, we may temporarily experience a combination of higher rates and a strong dollar. Many developing countries and other stressed foreign borrowers have borrowed in U.S. dollars at floating interest rates. They would then face the double whammy of higher currency and interest repayments.

As I mentioned earlier, financial crises in recent years have tended to originate at the periphery of major economies, where transparency is elusive, the role of the U.S. Federal Reserve more diluted, and the size of consequences is often difficult to anticipate. It seems like a good time to prepare for the unexpected and look for signs of stress in the less-monitored areas of the globe.

François Sicart – 4/4/2022

 

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

 

 

Two Years Behind Us

If we look back at 2020 and 2021, stock investments have had clear turning points. Until late February 2020, it looked like yet another decent year ahead with strong fundamentals and peak economic performance. Some could say that it was too good to be true for too long. That’s why we entered 2020 with a fairly cautious stance.

We took advantage of the buying opportunities presented by the March 2020 sell-off. We enjoyed the stock price and business recovery of our holdings through the end of 2021.

That period though was not all smooth sailing for investors. In the first half of 2021, we saw high-flying growth stocks take a break from the rally, only to catch up in the second half of 2021.

As we kept up with our holdings and considered future potential buys, carefully studying each earnings report, we started to notice a shift around summer 2021. We witnessed more disappointment among enthused investors. This new phenomenon continued through the end of the year and further into 2022.

As we are putting the finishing touches on our update (3/2022), the market seems to have hit a temporary invisible wall. It doesn’t mean that there are no compelling opportunities to add to our portfolio, quite the contrary. The renewed volatility already drove down the prices of a good number of potentially interesting companies.

We decided to act and gradually buy some new holdings.

With the latest COVID wave mostly behind us, we are witnessing a quick shift in policies towards fewer restrictions. If that direction continues, we believe businesses, consumers, and workers can hope for some new normal ahead. That’s something we are yet to see and define as we move past the last two very unusual years.

We wrote last time, “although we have seen some unexpected stock market heroes in the last year and a half, it has been one of the most challenging times to navigate.” Late 2021 and early 2022 might have been a refreshing pause in the rally that proverbially lifted all boats. The path forward may not be that obvious. We are always keeping a steady course, and we aspire to be the least wrong. We remain prepared no matter which scenarios play out in the end.

Long-term Goals

Our long-term goal remains the same for all the assets we manage. We intend to both preserve and grow the capital over time. We seek to double our clients’ wealth every 5-15 years, which translates to a 5-15% annual rate of return over the long run, but we would like to accomplish it without exposing the portfolios to the risk of a permanent loss of capital. Of course, performance cannot be guaranteed, and past performance is not indicative of future results.

Our strategy can be described as a long-term patient contrarian. All securities are selected through an in-house research process. Our investment horizon for each individual holding is usually 3-5 years.

We intend to hold between 30-60 stocks, mostly US equities, but we may invest in foreign securities as well. We don’t use any leverage; we don’t own any derivatives. We may supplement the strategy with exchange-traded funds (some of them may use leverage or derivatives).

We don’t have a predefined portfolio composition target. We may hold cash at times, but we prefer to own businesses, and when the opportunities abound and prices are right, we will likely be close to fully invested.

The second half of 2021

In the first quarter of 2021, we saw a rally in small-cap stocks, while large caps, and especially technology stocks, hesitated. In the second quarter and through the second half of the year, small caps traded sideways, while large caps and technology stocks steadily rose.

Around summer, though, as earnings started to come in, we noticed a peculiar shift. There was a growing number of companies that benefited from strong fundamentals and price momentum earlier in the pandemic but were facing some headwinds now.

In many cases, investor enthusiasm pushed the stock prices ahead of fundamentals. The consumer demand remained elevated, but year-over-year comparisons were less impressive. The market proved to be unforgiving to some of those stocks. It created several buying opportunities for us.

It also set the stage for what we saw late in 2021 and early 2022. The market started to cool off from the earlier rally. We witnessed some record-setting daily big drops in a number of stocks that were market darlings only a few short months earlier.

In our mind, it was a sign of the fundamentals prevailing yet again. The actual earnings power mattered more than promises of growth and the excitement of rising price momentum.

We are yet to see if it’s a long-lasting pause in the market rally or a chance for more pockets of weakness in various market segments. As long-term holders and patient, disciplined buyers, we always welcome price volatility and panicked selling.

Finally, it’s worth noting that the market valuations came down. As earnings rose, the stock prices dropped. It’s too early to say that the market as a whole looks compelling, but we believe there are definitely more opportunities around than in a while.

What we wrote last time applies today: “as much as we pay attention to the overall market trends, we like to look at our performance independently from the benchmark. As long as the businesses we own report improving fundamentals, and the market eventually prices them accordingly, we are happy.”

Interest rates on the rise

Things finally got interesting on the interest rate front.

Last time, we mentioned the staggering fiscal and monetary help that came unleashed when the pandemic hit. We also added how the Fed’s monetary support never paused. Later in 2021, the Fed started to get ready to back away a bit. The inflation fears set the stage for some potential interest rate hikes going forward.

1-year treasury rate spiked in late 2021 to over 1%, it was around 0% for most 2020 and 2021, and for reference reached over 2.50% in mid-2019, after a steady but slow 5 year-long rise from near zero territory between 2009 and 2015.

1% may feel like not a lot, but when we take into account that it was at 0.05% in May 2021, that’s a 20x higher cost of borrowing for one year for the US treasury and everyone else, too.

The closer we navigate around zero, the smaller changes can make bigger waves in the cost of credit and asset prices.

The 1-month treasury rate remained close to zero, but the 3-month rate spiked from almost zero to 0.35%.

The tide seems to be turning just as US inflation reached 7.48% based on a 12-month change in CPI (February 2022). That’s a level US consumers and businesses haven’t seen since the early 1980s.

As much as we consider ourselves bottom-up stock pickers, we pay close attention to the macro environment we operate in, and both inflation and rising rates have been on our minds lately.

Supply, demand, inflation

In the first half of 2021, we saw supply chain constraints, demand recovery, and inflation gathering speed.

In the second half, supply chain issues continued, but in some segments, we started to see normalization. The demand continued to evolve, too. In some cases (cleaning products among them), it remained elevated but hasn’t grown year over year as much it did in the previous year.

Businesses also faced input cost increases from commodity to labor.

Pricing power came to the forefront of our attention. Can the businesses raise prices, and will the consumer accept it? We’ve been paying more for anything from a basic grocery basket to rent and movie streaming at home.

Inflation has an impact on consumer psychology. When it reaches a certain level, it starts to affect the shopping decisions. Consumers may accelerate some purchases or choose to forego others completely.

We are yet to see how many of the recent challenges are long-lasting and how many will pass as the supply and demand find a new firm footing beyond the pandemic years. The same applies to inflation.

 What’s ahead?

The US economy is still the biggest, healthiest, most diversified in the world. Given its depth, size, and liquidity, the US stock market seems to remain the most appealing home for the most innovative, new companies, even if they originated in Europe, Asia, Africa, Australia, or South America. At the same time, US companies are global and benefit from long-term growth and prosperity around the world. They operate under US laws, follow US disclosure requirements, and promote a shareholder-friendly culture, making them appealing investment choices for us. We are optimistic about the US, and the US business, while near-term, we remain cautious about the stock market as a whole. We are happy with our stock portfolio of selected, vetted, well-researched businesses.

What do we expect going forward? We build the portfolio for any possible scenario, and our goal always is to be the least wrong with our investment choices. Given the level of uncertainty from inflation, interest rates to new policies, and now also, the Ukraine-Russia conflict, we are not surprised to see renewed volatility in the markets, and volatility can be a friend of a disciplined, patient investor.

What could we have done differently?

In a rising market, everyone wants to be fully invested; in a falling market, everyone hopes to be completely out of the market. We always proceed with caution. We might have lagged in the second half of the 2021 market rally, but our stock selection has paid off so far in 2022 (3/2022). We often say that what we don’t own matters as much as what we do own.

As much as at times last year we looked back and thought that we wished we had been more invested right away after the 2020 sell-off, we found some redemption in early 2022; we are glad today that we kept our steady course through 2021 and haven’t given in to FOMO (fear of missing out).

We have been happy with the holdings we bought, and their performance shows that stock selection mostly met or even exceeded our expectations.

We remain optimistic about the long-term growth prospects of the US and the world economy. 2020-2022 markets reminded us how challenging and unpredictable the markets could be. They convinced us further that patience and caution are the best way forward.

Happy Investing! |  Bogumil Baranowski | Published: 3/16/2022

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

The major US indexes sold off in the last few weeks. This inspired a whole range of reactions. Many panicked, some froze, and others quickly acted and bought selected stocks. The last group is usually smaller and follows Warren Buffett’s famous wise words: “be fearful when others are greedy and be greedy when others are fearful.” If we define a contrarian as someone who tends to go against the crowd, I start to wonder if we all can be contrarians at the same time? Can we?

When I was growing up in the 1990s Poland, you had to save to buy anything from a TV to a car. Friends and family could help, but consumer credit wasn’t readily available. I recall that interest rates were high, inflation was roaring, and uncertainty abounded. Interestingly enough, that is a set of circumstances that most US investors, especially those my age, have never experienced personally. However, they might be getting a very subtle taste of it these days.

Years have passed, today’s Poland and even more so the US have definitely different shopping habits than those I grew accustomed to. The motto is: buy now and pay later. More and more goods from small items to cars are available through monthly payments. Cars are available through various financing methods; many don’t even give you the actual ownership of the vehicle. What’s more, it seems it would take an excellent knack for numbers and a robust financial calculator to figure out the actual total cost to enjoy that car over the next few years.

My cautious view on consumer credit shared by the majority when I was a kid has become a contrarian view in today’s world. Was everyone a contrarian then, and a few are today?

Maybe what we do as money managers, investment advisors, investors is less about being contrarian and wisely and selectively opposing the views of the majority, but rather about keeping our principles permanent no matter how much the world around us gets lured by greed and tormented by fear.

A calm, collected, disciplined approach of evaluating businesses based on their fundamentals and buying based on value can be applied in the midst of a market euphoria as it is in the darkest moments of a market crash.

The same investment principles might have led us to buy an underappreciated railroad stock some 150 years ago, a promising retailer 50 years ago, and an asset-light cloud-based high, margin technology-driven company today. The principles remain the same.

What we do is as important and as simple as what  Morgan Housel (a prolific financial writer and author of The Psychology of Money) described recently as “Outperforming by merely ‘doing the average thing when everyone else around you is losing their mind.’”

I recently took a closer look at a company that we have known for years. It’s a stable, high free cash flow business that got caught in the pandemic rollercoaster ride of rising demand, input cost inflation, and supply chain headaches. What intrigued me the most were the clear and wise principles that frame and shape the management’s decisions. All I need is a few years’ worth of annual reports and financials, and an evening or two later, I can tell you the vivid story of the business and present it as a clear series of choices the leadership made.

Over the last decade or two, many companies like this one have taken advantage of low-interest rates and credit availability. They decided to borrow to pay excessive dividends and conduct share buybacks at very high prices. It’s all usually done in the name of a quick rise in per-share profits and the stock price. Short-term stockholders applaud and get a quick boost, while the company is left with debt and very few options to maneuver in times of distress.

This company continued to follow the same principles that many others followed not long ago. Because it remained set on its course, it suddenly found itself as a contrarian. Again, it’s not that it choose an opposing view to others, but rather the others made choices that are at odds with the ones of this particular company.

When the US stock indexes came under pressure in January 2022, we watched how our holdings performed. We realized again, what we often shared before – sometimes what we don’t own matters as much or more as what we do own. Our portfolios of 30-60 stocks aspire to weather the market storms better than the broad market indexes. Is it always the case? No, but it often makes enough of a difference and allows us to sleep better.

With prices of many stocks falling, we immediately started searching for buying opportunities. We looked at the fundamentals, the actual earning power of a business, and the newly discounted prices that we would need to pay. The indexes were down 10-15% or so. The true treasures appeared among stocks down 40%-60%, not just in the previous four weeks but also in the last few months.

Many of them were down for likely the right reasons, but we believe some look disproportionately punished by the negative investor sentiment that started to prevail. As many of our clients rightly assumed, we went shopping. We gradually and cautiously acted on the new opportunities that appeared right in front of us.

Does a 10-15% sell-off mean there won’t be another one sometime soon? – No, but the panicked sellers left enough buying opportunities behind that we couldn’t ignore them. Will the prices get even more attractive in the future? – Maybe, but that’s why we buy some and leave room to add earlier. It’s been our practice for years.

Were we contrarians buying in the sell-off? Judging by the majority view that led to the sell-off, we held an opposing view, maybe even a minority view. Among the like-minded investors, we were all contrarians, though. After a number of phones calls and emails with friends and colleagues who share the same investment principles, we discovered that others were looking and shopping, too. We hold the same timeless principles in that particular group of disciplined investors (no matter how small it’s become), and we are definitely all contrarians!

 

Happy Investing!

Bogumil Baranowski

Published: 2/3/2022

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

As 2021 is coming to an end, and a brand new 2022 is right around the corner, many of us start to think about New Year’s Resolutions. What do we want to accomplish next year and beyond? Traditionally many look for ambitious goals: make that many dollars, lose that many pounds, read the many books by year-end, and more. In life and investing, success often comes not from a lofty goal with a fixed deadline but rather the process built on helpful habits that lead to favorable outcomes. Let me explain.

The three most popular New Year’s Resolutions cover healthier eating, more exercise, and saving money. Right after better food and more physical activity, our attention falls on money.

In my book, Outsmarting the Crowd, I write about the mantra – earn, save, invest. I explain how the money will grow over time if you underspend your income and invest what’s left. The opposite is true as well; if you outspend your income over a lifetime, there is only excess debt and financial stress waiting for you on your journey.

This is a well-known truth, the same as the need for a better diet and more exercise. Those truths can be seen as almost trivial. It doesn’t make following them any easier, though. The challenge lies in creating little repeatable habits that build the right process.

This year, I enjoyed reading three great books on habits: The Power of Habit by Charles Duhigg, Atomic Habits by James Clear, and Tiny Habits by BJ Fogg. Maybe I was thinking ahead of my New Year’s Resolutions; perhaps I noticed how my daily habits, routines changed since the pandemic sent many of us home last year. Whatever the reason, each taught me something new about the habits in our lives.

If there is one important lesson that they all have in common is to make the desired habit as easy and as repeatable as possible. If it’s an exercise routine, let’s make our journey from bed to the walking, running, or hiking trail as simple as possible. If it’s saving money, let’s automate it and forget it. Taking the pain points out of the process was the biggest revelation. Somehow, I thought that the more ambitious, the harder the habit, the better, but that’s not a good place to start. There will be days and months when we just don’t feel like doing whatever we intended to do; making the hurdle as low as possible is key.

It reminds me of companies that never want to break their dividend-paying record, and in leaner years, they cut the dividend to a single cent. It may be nothing, but it allows them to keep the habit. When the profits recover, there is no question whether they should resume the dividend or not, the dividend policy is in place, and now it’s all about raising it from that single cent. That’s how we can think of earning, saving, and investing. As long a cent trickles in, the habit is alive.

There might be days when no stock looks appealing and worth buying, yet, we still show up, read, research, cultivate the habit, keep the process going because the best opportunity might be right around the corner. If we are not looking, we won’t find it.

As tempting as it may seem to find ambitious goalposts and fix them at a particular point in time, it may not serve us well either in investing or in life.

When I think of my New Year’s Resolutions, I focus on habits that build the process that can lead to favorable outcomes: healthier, happier, more prosperous life. Most of all, I wonder how we can make them as easy as a single-cent dividend –a small deposit into the bank of wellness, well-being and wealth.

It keeps the good habits alive and compounding!

Happy Holidays! Happy Investing!

Bogumil Baranowski

Published: 12/23/2021

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

In the early years of my investing career, one particular stock attracted the most ridicule. I remember how various junior analysts would mention it to the more senior analysts and portfolio managers. It was the epitome of a bad idea, a fad, a laughing stock even. My contrarian bone must have been already developing at the time. Somewhere in the back of my mind, I thought, what if they are wrong?

From a near bankruptcy over a decade ago, the business persevered. The stock rose from $8 in March 2020 to $170 today and reached a $10 billion valuation (Source: Bloomberg). It’s not a tech company; it didn’t give us a self-driving car, a miracle drug, or a comfortable ride to Mars. It sells the same product it started with 20 years ago. The business not only made a comeback but grew and turned a nice profit, too. Some even believe that a former alleged fad gained a cult following of sorts, and if that wasn’t enough, the brand became a premium brand.

What’s amusing about investing is that you rarely know when the story is really over, and the least likely heroes offer the biggest payoffs.

What happened? The big operational changes from three years ago paid off and helped them navigate through a tumultuous pandemic reality. What’s more, that very pandemic lifestyle shift brought more people to the brand and the product. Comfortable ugly shoes were apparently precisely what we needed the last two years! Who would have thought?

What stock is it? Crocs! – a company famous for its bright-colored rubber clogs. I have never owned a pair, but I owned and recommended other shoe brand stocks in the past. Some have done well, some struggled. I’ve always had an affinity for consumer products and services, and I knew that finding a genuinely lasting niche in that space was quite a feat for any company that tried.

Crocs became a definition of a fad in the eyes of many investors. The company experienced quick success, a hot IPO with a fast-rising stock, not unlike many other recent hot IPOs. They couldn’t keep up with the demand and expanded aggressively. The 2008/2009 recession brought an end to it. In the first years on the stock exchange, its price rose five times; it lost almost 99% in the following two. It was a $1+ stock flirting with bankruptcy.

I remember walking past their Manhattan store, wondering how much longer they would be around. Customers seemed to have fallen out of love with their products as quickly as they initially embraced them. This is nothing unheard of, especially in shoes, apparel, or any other consumer product categories.

That’s what we call a fad. Fads come and go. Some companies can be too quickly dismissed as fads, while others can be mistakenly taken for having a cult following, while they turn out to be short-lived fads.

From an investment perspective, it’s a dangerous territory that could also be full of great potential and opportunities. Any analyst trying to recommend Crocs when it was a $1 stock would have been ridiculed. The company wasn’t out of the woods five or even ten years after the 2008/2009 recession, and it only closed its manufacturing and rethought its retail footprint in 2018. It was a treacherous path of many attempted revivals.

When March 2020 came with the abrupt market sell-off, Crocs’ stock price dropped below $10, still 1/6^th of the 2007 record high price (Source: Bloomberg). The brand and the company weren’t on my radar, and I still remembered it as one of the most ridiculed stocks ideas I have ever heard of.

Many years have passed, I almost forgot about it. Only recently, I came across it on three different occasions. First, I saw a few people wear their shoes, and then someone mentioned it in a newsletter as an unlikely turnaround story. Finally, I read a headline about this unexpected pandemic winner. I took a fresh look, and I was intrigued by it, but more as an investment case study that could offer some great lessons rather than an actionable stock pick.

I have never owned Crocs, and as a firm, we never invested in it either; we have no immediate intention to invest in it now either. There is nothing contrarian about it anymore, but it didn’t stop us from learning something from this experience.

Reading up on Crocs and its remarkable, even unbelievable journey, I thought of those days over a decade ago when seasoned investors ridiculed the stock and fashion aficionados ridiculed the shoes. I’ll think twice next time I hear someone laugh at an investment idea or product.

There might be some surprising winners where few dare or care to look for the simple reason of being ridiculed for it! Being more immune to ridicule is an excellent lesson for any stock picker young, and seasoned. Over the years, we owned many stocks that at times earned us some smiles. We trusted our judgment, though, and pursued some unlikely stock picks. Next time you see a stock in your portfolio that makes you smile or even laugh think of Crocs – we might just be on to something.

Happy Investing!

Bogumil Baranowski

Published: 12/9/2021

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

With almost every other tech billionaire building a space rocket these days, it dawned on me that time travel compared to space travel remains still completely undiscovered. There is no cryptocurrency, SPAC (special purpose acquisition company), VC fund (venture capital), or ETF (exchange-traded fund) that invests in time travel (that I know of). Not yet, at least.

If I were a physicist, I’d be curious what kind of laws of physics we need to bend to make it happen. If I were an engineer, I’d be researching durable and light materials to build a time machine. Since I’m an investor, it should be no surprise that I’d like to know what kind of portfolio I’d take with me on this journey!

Humanity has shared tales of time travel from ancient Hindu, Buddhist or Japanese myths to more recent Washington Iriving’s 1819 Rip Van Winkle or H.G. Wells’ 1895 The Time Machine or the Hollywood’s Back to the Future 1980s Trilogy and more.

It’s already the fall of 2021; we are a few months short of two years with a global pandemic impacting our lives, economies, and investments. With debt ceiling talks, trillion-dollar spending plans, new taxes, inflation, political shifts worldwide, climate change, COVID variants, and more, uncertainty abounds. It might be a good time to zoom away with a time machine, and take a longer-term view forward and back, and see if we can make wiser decisions about what’s right in front of us: today.

Time travel can potentially have both directions. Physicists still seem to be arguing which direction is more likely. To sharpen our investment thinking, in our discussions, we sometimes indulge in mental experiments. We like to take some ideas to their logical limits, which can reveal something new about our approach. Time traveler’s portfolio serves that purpose.

If we were going back to the past, what kind of investments would we take with us? Stocks, gold, cash, real estate, let’s even consider cryptocurrencies for a minute. If we go back a hundred years or more so, five hundred years, whatever skills we acquired in this life might have no value in the past. Even a farmer or a writer trained in today’s technology and language might have difficulty finding gainful employment at our new destination. Bringing a small fortune, a nest egg with us, makes a lot of sense.

We’d be ready to dismiss cryptocurrencies in a heartbeat, they weren’t around yet, and they would be of no value to anyone. Real estate, let’s say we can take a timeless property title with us back; it could potentially work and serve as shelter or source of income. If it’s a high-tech online retailers’ warehouse, though, it would need to be repurposed.

What about cash? If we ignore the fact that future dates are printed on today’s money and choose a currency that’s been around unchanged long enough to matter still, we could be ok or even better off. Today’s dollars are worth a fraction of 1921 dollars. In other words, each dollar today would buy around 15x as much a hundred years ago. If we travel further back, before the current dollar, we might have trouble finding takers for our cash, though.

Stocks are promising but tricky. The successful ones tend to grow in value over time, which means that if we take today’s shares with us back in time, they’d be worth a lot less. Who would want to buy today’s Apple shares and bring them back to the day when Steve Jobs only started his company? We could be creative and take some shares of companies that experienced a past success but faced a slow demise more recently. This way, we’d buy their shares cheaply today and be able to sell them for much more in the past. That’s an arbitrage worth considering. We might have to make a few stops on the way and pick up Kodak or Polaroid on the way. Neither is around anymore, but both experienced their glory at some point.

What about gold? Interestingly enough, we might be able to travel to almost anytime in the past, at least the last few millennia, and do just fine with gold. Whether it’s the Middle Ages, Ancient Greece or Rome or Babylonian or Egyptian times, few would say no to gold, and that’s food for thought.

What about the future? If we were to transport ourselves a hundred years to 2121 or a thousand years to 3021, what portfolio would we’d take with us? When I think of cryptocurrencies, I think about how technology changes quickly. I picture myself with a VHS cassette and a floppy disk in my time machine, neither would be very handy today. Will the same happen to cryptocurrencies? Something new and better will replace them? Or will they be long forgotten as a short-lived phenomenon of the past? I’d think twice about taking this bet.

Real estate is peculiar when it comes to the future. I always thought that if I buy a house, a mall, or a warehouse, I still have one home, one mall, one warehouse after a hundred years. They don’t mushroom over time the way corporate profits can. Hopefully, I kept my purchasing power in the process while paying property taxes and maintaining the asset. With real estate, best case, it’s still around and usable a hundred years later. Having said that, traveling around Europe over the years, and parts of the US, too, I have seen so much formerly valuable, desirable, coveted real estate that’s abandoned, forgotten, and unusable today – ghostly structures of past manufacturing plants or castles among them.

If not crypto, not real estate, what about cash? We know how paper currencies of today are built to lose value over time. Inflation slowly or not so slowly erodes our dollars’ purchasing power, euros, and hundreds of currencies that aren’t with us anymore. We are also running the risk that the currency we take with us will no longer be used once we arrive at our destination. My grandparent’s house had a drawer full of paper money that turned worthless over time. Poland changed currencies many times over. French francs, Italian lira, Spanish peseta aren’t around anymore. Picking the right paper money might be challenging, and hoping it maintains much of its purchasing power over a hundred or a thousand years might be wishful thinking.

What about stocks? No matter how we pay for services or goods, businesses will provide those and charge for them. They may come and go and reinvent themselves in between.

Isn’t it interesting that we can make better assumptions about the future by looking back? There is a mutual fund that bought 30 stocks in 1935 and hasn’t bought anything new since. The businesses they owned, merged, sold, had spin-offs; in other words, they transformed, but the wealth invested in them continued and grew. This fund is a bit of an extreme, and stock investing doesn’t get more passive than that. If we were to travel to the future, it would be great to have someone keep an eye on our holdings, an investment firm that values longevity and continuity over generations. Our fortune, nest egg, would be in good hands, waiting for us at our future destination.

What about gold? It has a millennia-long track record of keeping purchasing power over time; the odds are it will continue in the future. A bar of gold has technologically made no progress in 5,000 years. The edges might be sharper, but a bar of gold is a bar of gold and will be very much the same bar of gold 5,000 years from now.

Lastly, we don’t have to pick one asset to take on our past or future trip. We can have a collection of assets. Going back in time, we might want to bring gold, very selected stocks, and wisely chosen cash. Going forward in time, we’d want stocks, gold, or even better, an investment philosophy perpetuating portfolio over time, and on longer trips into the future, we’d pass on cash and very reluctantly consider real estate.

I know; it’s just a mental experiment. I used to think that interest rates could be only positive; there is no room in economic theory for negative rates. The idea itself undermines the very foundation of money, capitalism, investment. Why would I pay someone to borrow money from me? Yet, that’s exactly what anyone buying negative-yielding bonds today is doing. Our central bankers are defying the laws of economics or common sense, for that matter. Why wouldn’t we one day defy some laws of physics and jet back and forth in time? When the day comes, you’ll know what kind of portfolio you’d want to bring with you. And with this fresh perspective of a time traveler, maybe we can make wiser choices right here, right now – today.

 

Happy Investing!

Bogumil Baranowski

Published: 10/28/2021

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

Pennies, cents, pounds, dollars, euros – it’s sometimes curious how we think of money. A while ago, I remember someone sharing with me a tale of old Wall Street. With a lot of self-made fortunes, many investors tended to be penny-wise but at times pound foolish. The smaller amounts were easier to relate to, they felt familiar, and the larger ones were so disproportionately big that the right penny habits didn’t capture them. Doesn’t it happen to us all now and then?

As simple as it may seem, it would be ideal to be wise with both pennies and pounds. Maybe even wiser with pounds than pennies? Who would know it better than the famous billionaire investor who literally turned his childhood newspaper route cents into over a hundred billion dollars in various holdings? I can’t help but think of his story of not selling his Berkshire Hathaway shares back in 1964 because the price was a few pennies short of what he expected.

Berkshire was a terrible business, as Buffett admits in his letter: “Berkshire – Past, Present and Future.” It was meant to be a short-term holding, and only about 7% was owned by Buffett Partnership. Because Berkshire’s CEO purchase offer short-changed Buffett with an eighth of a point, which in old Wall Street speak meant 12.5 cents (at some point, it was the smallest amount a stock could change in price), Buffett ended up buying more of Berkshire. He writes: “I became the dog who caught the car.” Berkshire’s textile business became a very costly distraction for the following 18 years, when the mills were finally closed.

All this trouble for 12.5 cents! Buffett called it a “monumentally stupid decision.” Penny wise, but pound foolish.

I get asked now and then about budgeting and tracking your expenses. I am a big fan. How can we start to be wise with dollars if we haven’t figured out the pennies, I always wonder? That’s the only way to get a grip of your spending, no matter where your monthly budget falls. I credit my grandma for instilling in me the importance of pennies and cents. I can see how they add up and grow. Buffett’s longtime business partner, Charlie Munger, said that the first $100,000 is the difficult part of building wealth. He advised: “I don’t care what you have to do—if it means walking everywhere and not eating anything that wasn’t purchased with a coupon, find a way to get your hands on $100,000.” In the book on Munger “Damn Right”, we read: “Making the first million was the next big hurdle. To do that, a person must consistently underspend his income.”

Before we get to bigger numbers, it seems that a million is what we can all agree on. It’s one with six zeroes. When we leave the cents, the dollars, everything gets a lot more confusing.

What’s a trillion dollars? How many zeroes is that? Apparently, we can’t even agree on that! As defined on the short scale, a trillion is one million million (ten to the twelfth power or one with twelve zeros). That’s what we use both in American and British English. Continental Europe, where I received most of my education, a million million is “only” a billion. I bet that U.S. policymakers would be relieved if they knew that their trillion-dollar spending plans translate as “only” billion-dollar plans in the long scale. Let’s not share it with them. On the other hand, the half a dozen trillion-dollar tech companies that we have in the U.S. today would be rather sad to lose their gilded status and be referred to as “mere” billion-dollar companies (again!). Speaking of billions, some may still remember a failed libel lawsuit filed by a famous billionaire over being called only a millionaire.

I remember watching an interview with a Brazilian billionaire Eike Batista who made a fortune in oil, gas, and mining. He expected to be the richest person in the world in no time. With lots of leverage, gigantic speculative bets, he got as high as the eighth spot on the world’s richest list. A year later (about a decade ago), he was reported to have a negative one billion net worth down from $35 billion. His experience made me realize that there is no amount of money that can’t be lost.

Bill Hwang from Archegos Capital, or as the media described him, “the greatest trader you have never heard of” managed to lose $20 billion in two days only earlier this year. His net worth might have seemed as “liquid as a government stimulus check,” as Bloomberg wrote, but was used to build a $100 billion portfolio with borrowed money. The market turned, and the highly leveraged trade quickly went south.

Both former billionaires openly shared on many occasions how they grew up in modest circumstances—both knew well how to count pennies. Neither of the two investors was in dire need of quick gains anymore, though. Warren Buffett reminds us often that: “It’s insane to risk what you have to get something you don’t need.” We learn from another investor, and author Vitaliy Katsenelson that “You cannot use logic and reason with a person who wants to get rich fast.”

When we make small spending decisions, we seem to be well versed in the amounts we are dealing with. We all saved a few dollars on groceries here and there. We are all probably guilty of driving an extra mile to buy gas 10 cents cheaper. We all might have gotten offended when we saw a cup of coffee priced a few nickels higher than we are used to. It gets a little tricky when the amounts get bigger. We buy cars looking at the monthly payment, or we buy homes looking at the monthly mortgage. We forget to look up and see the full price tag or the million-dollar mortgage behind it – the true cost.

I see how investment decisions can be taken with equally insufficient care. Highly speculative derivatives are bought for cents per contract but amount to million-dollar losses taking away a lifetime of savings. Big, quick, abrupt choices are made with large amounts only because they seem harder to embrace, and the true risk escapes our imagination.

In the last year and a half of market and economic recovery, we have witnessed a more than usual size and frequency of riskier behavior. Hard-earned savings have been spent and invested in less careful ways at times, and if that wasn’t enough, they were supplemented with borrowing.

We all probably have been more than once penny wise and a touch pound foolish at some point, but the same way Buffett looked back and learned from his mistakes, maybe we all can get a bit wiser when our cents turn into dollars. It would be ideal to be wise with both small and large amounts.  Maybe even wiser with the larger ones. If we treat our dollars with the same care and patience that we treat our cents, we’d be better off in the end; at least, that’s what I plan to do!

 

Happy Investing!

Bogumil Baranowski

Published: 9/23/2021

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

A Year Like No Other

When we discussed 2020, we emphasized the importance of patience and timing. We started 2020 with a cautious stance. Our patience paid off when in March 2020, we witnessed one of the fastest market corrections on record. We acted quickly and deployed capital buying securities available at multi-year low prices. It was a brief but hugely attractive window of opportunity for disciplined investors. We have been reaping benefits since.

In the last year and a half, the equity markets have recovered, so has the economy. We also have seen signs of inflation. With big vaccination programs in the US, Europe, and increasingly around the world, we saw a wave of more relaxed rules and restrictions, which sped up the business recovery.

This is not the whole story, though. International travel is still subdued, Delta variant fears are still looming, while a large portion of the population remains unvaccinated. At the same time, uncertainty remains elevated, and consumer confidence recovery took a pause.

Although we have seen some unexpected stock market heroes in the last year and a half, it has been one of the most challenging times to navigate. The path forward doesn’t look that obvious either. We are keeping a steady course, and as always, we aspire to be the least wrong. We remain prepared no matter which scenarios play out in the end.

Long-term Goals

Our long-term goal remains the same for all the assets we manage. We intend to both preserve and grow the capital over time. We seek to double our clients’ wealth every 5-15 years, which translates to a 5-15% annual rate of return over the long run, but we would like to accomplish it without exposing the portfolios to the risk of a permanent loss of capital.

Our strategy can be described as a long-term patient contrarian. All securities are selected through an in-house research process. Our investment horizon for each individual holding is usually 3-5 years.

We intend to hold between 30-60 stocks, mostly US equities, but we may invest in foreign securities as well. We don’t use any leverage; we don’t own any derivatives. We may supplement the strategy with exchange-traded funds.

We don’t have a predefined portfolio composition target. We may hold cash at times, but we prefer to own businesses, and when the opportunities abound and prices are right, we will likely be close to fully invested.

The first half of 2021

After a whirlwind of a year, the first half of 2021 could be seen as two distinct quarters. The first quarter or even the first five months showed some hesitation among the high-flying tech stocks, which had a great run in 2020. Their businesses proved to be less exposed to lockdowns than the more traditional economy. The rest of the equities had a chance to catch up, especially smaller companies and those considered value rather than growth. The latter months of the first half of the year gave Nasdaq, the tech index, an opportunity to catch up. The hare became the tortoise only to hop forward again.

As much as it is intriguing to watch the various segments of the market fall behind and play catch up, it’s been much more interesting for us to watch earnings as companies have reported more quarters of improvement and recovery. As investors, we pay attention to the fundamentals while we patiently wait to see the market appreciate promising trends. We believe that it is the fundamentals that matter in the end. On this front, we were happy to see that many of our holdings not only recovered but also exceeded the metrics from before the pandemic.

As much as we pay attention to the overall market trends, we like to look at our performance independently from the benchmark. As long as the businesses we own report improving fundamentals, and the market eventually prices them accordingly, we are happy.

The Fed came to the rescue… and never left!

Discussing 2020, we emphasized the unprecedented rescue that came from the Federal Reserve. The US stock market dropped some 30% in March 2020, which actually matched the lowest read in the economic activity during the pandemic. In other words, the market made a fairly accurate estimate of the impact of COVID lockdowns.

The policymakers didn’t stand still. The Fed added trillions to its balance sheet lowering the cost of borrowing and providing additional liquidity. It led to asset appreciation all around from stocks, real estate to even used cars. The Fed’s generous policy facilitated the numerous multi-trillion government spending plans. The shortage of yield in a near-zero rate environment fired up investors’ appetite for risk. It invited a record stock and debt issuance among US companies. It’s the most unusual phenomenon given that with higher risk, higher uncertainty, one would expect risk aversion, and caution.

As much as the Fed’s intervention in 2020 could be explained by an unprecedented economic debacle, it’s a lot harder to understand why a year and half later, the Fed is still keeping the proverbial pedal to the metal. The monthly asset purchases conducted by the Fed continue. Only now, we are hearing some signs of a possible shift in policy as the market distortions become more blatant and harder to ignore. The red-hot U.S. housing market has been one of the side effects of a low-rate environment.

Fiscal stimulus with trillion-dollar spending plans hasn’t slowed down either. At least for now, both monetary and fiscal policies seem to ignore the economic and market recovery and inflationary pressures.

Supply, demand, inflation

Price stability or low inflation has been a goal of central bankers ever since the hyperinflation era in Europe of the 1920s. Then later the 1970s in the US brought renewed inflation headaches, which brought back monetary discipline. In the last fifty years, though, both in the US, and Western Europe, inflation has become an almost forgotten boogeyman. It was less the case for those who grew up in Eastern Europe or South America and witnessed the havoc wreaked by inflation in their economies, savings, and asset prices.

In the first half of 2021, the US recorded the highest levels of inflation in decades (with a 4.9% read). Prices rose, and in some cases, as in, for example, the used car market, they jumped so high that old cars were selling at the same prices as new cars. It’s impossible to analyze these renewed inflation fears without a context. Economics 101 teaches us about supply and demand and the level of prices. The last year and a half, and possibly more so 2021, have been a time of pandemic-related supply constraints, on one side, and demand propped up by monetary and fiscal policies and boosted by post-pandemic “you only live once” spending habits. With a lot of money chasing fewer goods, it was a matter of time when we saw prices rise.

We find it helpful to distinguish two sources of inflation. The first one might be indeed short-lived, but the bigger inflation tailwind might be here to stay. Once the supply and demand normalize, frenzied used cars and home buying calm down; we’ll see what a sustainable price level could be. The bigger issue is the overhang of the massive multi-trillion dollar spend and print policies of 2020-2021, which builds on earlier crisis responses from over a decade ago. If those never slow down, pause or reverse, there isn’t much that can help us escape inflation in the long run. That is just the nature of any print and spend policies ever tried by humanity since we embraced the concept of money and debt five millennia ago.

If policymakers experience a sudden change of heart, the Fed could slow down asset purchases or even clear its balance sheet, while the Federal government could normalize its spending. If that were to happen, it is not unlikely to even see some deflation.

We try to keep an open mind and remain flexible with our investment choices, watching the outcomes of these gargantuan policy moves.

What’s ahead?

The US economy is still the biggest, healthiest, most diversified in the world. Given its depth, size, and liquidity, the US stock market remains the most appealing home for the most innovative, new companies, even if they originated in Europe, Asia, Africa, Australia, or South America. At the same time, US companies are global and benefit from long-term growth and prosperity around the world. They operate under US laws, follow US disclosure requirements, and promote a shareholder-friendly culture, making them appealing investment choices. We are optimistic about the US, and the US business, while near-term, we remain cautious about the stock market as a whole. We are happy with our stock portfolio of selected, vetted, well-researched businesses.

What do we expect going forward? We build the portfolio for any possible scenario, and our goal always is to be the least wrong with our investment choices. Given the level of uncertainty from inflation, interest rates to new policies coming from the new US administration to ongoing COVID health, and economic risks, we’d be surprised to see no renewed volatility in the markets. We always welcome small and large shake-ups of that nature since they offer compelling buying opportunities.

What could we have done differently?

In a rising market, everyone wants to be fully invested; in a falling market, everyone hopes to be completely out of the market. We acted quickly in March, April 2020; we added a number of holdings since. It’s an impossible task but had we known that the monetary and fiscal response would be so big, and so long-lasting that we would experience the quickest economic and market recovery on record, we would have rather been 100% invested. With worldwide lockdowns, and no vaccine in sight, we operated with the visibility that we had, and it’s unlikely we would have been more aggressive at the time.

We have been happy with all the holdings we bought, and their performance shows that stock selection met or even exceeded our expectations.

We remain optimistic about the long-term growth prospects of the US and the world economy. 2020-2021 markets reminded us how challenging and unpredictable the markets could be. They convinced us further that patience and caution is the best way to forward.

 

Happy Investing!

Bogumil Baranowski

Published: 8/2/2021

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

I remember standing in front of Casino de Monte-Carlo in Monaco when I was a kid. I enjoyed looking at some of the cars parked in front of it. I have visited this sovereign city-state three times since. I like the windy roads, the vistas, the weather. I don’t recall ever being inside a casino in my life, though. I have never gambled in one, but I consider myself a lifelong investor, a stock picker, a business owner. It worries me how much the vocabulary, the words around investing, start to sound like something one would overhear among roulette players or slot machine enthusiasts. I believe that words do matter, and the more investing sounds like gambling, the more unwanted trouble you may get yourself into.

Casino de Monte-Carlo is almost 160 years old. It was opened to help save the ruling family House of Grimaldi from bankruptcy after losing tax revenue from nearby towns. You could say that they made a fairly sure bet since the house always wins. It has, in this case, too. The idea turned out to be a success, and the casino served as the primary source of income for the Grimaldis and the Monaco economy until recently. Its name was even borrowed to label a class of computational algorithms – Monte Carlo methods.

We know well that many patrons of casinos have gone bankrupt looking for quick riches. We even know that there were casinos that have gone bankrupt. It had more to do with poor management combined with economic recessions rather than an unfavorable outcome of any game of chance. The casino is a business, though, and any business can’t be mismanaged and fail.

The stock market, or more precisely a stock exchange, used to be a physical place where buyers and sellers came to exchange ownership of shares of companies. Shares are pieces of businesses, not just tickers with prices. They represent participation in an actual operating company. The company can be offering services or goods to customers.  They do it to earn a profit and enrich their shareholders in the process. Today, we still have buildings that house or housed stock exchanges. The actual trading happens almost anywhere, and it’s virtual. How stocks change hands is really secondary. The nature of the stock exchange might have evolved from physical to virtual, but its role remains the same: a place to buy and sell stocks.

An investor buys shares of companies because they want to become an owner of the businesses that those shares represent. It’s no different than buying 20% of a local restaurant, laundromat, or gas station. Stock ownership allows us to build a collection of businesses. They could be local and operate in the same state or country where we live or be global and have operations worldwide. An investor’s success is correlated with the success of the business. An investor could be seen as a modern-day tycoon, just like Carnegie or Rockefeller. You don’t need billions or trillions to own pieces of great businesses out there; a smaller amount will do.

To me, the best test, whether one is an investor or a gambler, starts and ends with a simple question. Would you be comfortable holding what you own for at least a few years without being able to see a price quote or sell your shares? An investor carefully follows the fundamentals of the business. He or she wants to know if the company delivers profitable growth or is getting closer to that path. This means that each sale of a service or a good comes with a profit. If I own a growing, successful gas station in a promising neighborhood with healthy sustainable traffic, and I have a manager running the operations who finds new creative ways to monetize the location with other services, coffee, food, car wash, etc., I don’t need to know how much I would get for my 20% participation every minute of the day. As long as I know I haven’t overpaid for this business, I remain a happy holder, an investor.

We see our investment capital as money that our clients and we don’t need (at the moment) and money that our client and we can’t afford to lose. That sets a very particular framework for risks we are willing to tolerate and rewards that we choose to accept. Because the capital is not needed to cover any near-term expenses, it can be committed to a longer-term investment. At the same time, the capital may be hard, if not impossible, to replace; thus, we choose to avoid the risk of a permanent loss in any individual investment.

By eliminating large swaths of the stock universe, we lower the odds of coming across real lemons. We don’t buy companies with lots of debt, companies in fast decline, companies with questionable managements, and more. We often mention that what we buy matters as much as what we would never buy.

Some stock gamblers may chase those very lemons with hopes that they will turn less sour in a heartbeat, but they rarely do.

A stock gambler lives and breathes every stock price movement. They believe that the price is everything. It tells them whether they are wrong or right about their bet every minute of the day. This perspective turns the stock market into a casino, a ticker into numbers on a roulette table. With that mindset, it’s almost unnecessary to even know what they represent.

For stock gamblers, the money placed on bets is not only the money they do need but often money they don’t even have. It may feel new, but the phenomenon is as old as the stock market itself. There always those seeking quick riches with borrowed money-making quick bets on coin toss like gambles.   Today, we see a record level of margin debt. That’s borrowed money used to buy stocks. It jumped over 70% year-over-year alone, and it’s approaching a trillion dollars quickly.

Gambling has its appeal to some, and stock market gambling is no different than other gambling. Last year’s study showed that among those who traded for only one day, about 30% made a profit after fees. I imagine that very few leave the casino after a winning streak, and very few end their day trading gambles either. That’s enough success to invite more cohorts of gamblers. The study explained further that for those who traded daily for more than 300 days, 97% lost money.

Some argue that COVID-related restrictions led to a shortage of gambling opportunities and brought gamblers to the stock market. That might be the case. Unfortunately, it’s not just the new breed of stock market enthusiasts that are reshaping the investing vocabulary. I notice how the media is embracing it as well. I recently read how a very reputable, old investment research firm offers help identifying the next best bets on the new undiscovered meme stocks. These are stocks that have experienced an increase in trading not due to the company’s performance but social media hype. That’s a firm that made its name providing detailed business fundamentals for investors for decades now. Few can resist, and the gamble is on.

Investing takes both skills and luck, but with caution, experience, discipline, and patience, and most of all, with a long-term investment horizon, skills start to matter more than luck. I see our good fortune as a bonus rather than the reason for our success. A well-researched, well-chosen, well-bought stock can prove to go up much more than what we expected. We welcome those surprises, but we don’t leave our investment success to chance.

There is a method, there is a process, and the words we choose matter.

 

Happy Investing!

Bogumil Baranowski

Published: 7/1/2021

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

I remember getting introduced to a new client a while back. I was a novice portfolio manager. I was looking forward to our meeting, but I faced a bit of a challenge. I wanted to impress him with some new investment ideas that we could use right away. The stock market was reaching multi-year highs, everything looked pricey, and I had no immediate stocks I wanted to buy. The meeting went very well despite that, a nice lunch followed it, and I learned a lesson that day that I’ll never forget. It’s always the right time to start investing. Let me explain.

Whenever the stock market runs up as it has in the last twelve months, I get asked a similar question. Is this the right time to start investing, or should I wait? This question makes me think of the Chinese proverb: “The best time to plant a tree was 20 years ago. The second-best time is now.” Investing works the same way. We all wish we started a long time ago, but if we haven’t, today is the day!

Now and then, we get introduced by one of our existing clients to potential new clients. We always welcome the opportunity to help. It sometimes happens that they might be joining us when the stock market offers little in terms of immediately buyable new opportunities.

Today, the stock market levels might feel elevated, and the obvious investment opportunities might be scarce. There are always businesses out there that we respect and like, but the prices quoted by the market aren’t always compelling. The risks appear too high and the rewards too slim. In that case, we simply wait.

When I met our new client, I was in the early stages of transitioning from being an analyst to a portfolio manager. This growth path opens a world of opportunities but comes with great responsibility as well. The questions and challenges go far beyond whether this stock is a good buy or not. It encompasses a greater vision for the investment portfolio, its purpose, and how this particular stock can fit in the picture. The goal is to keep and grow wealth over the long run. We might be risk-averse and cautious, but we act quickly when compelling opportunities arise.

This new role of a portfolio manager requires a good amount of empathy and listening. It’s that moment when an investor learns that stock investment doesn’t exist in some financial void. It’s someone’s life savings or inheritance that are put at a calculated risk to harvest the rewards down the road. Since it’s someone’s capital, it’s essential to take into account the client’s preferences, and most of all, the risk tolerance.

I find that part very fulfilling. It closes the loop in my mind between picking an investment and seeing what role it can play in someone’s life, what difference it can make.

The new client that I was introduced to as a novice portfolio manager came with an existing portfolio. He had some legacy stock positions. When we spoke, he took the time to walk me through the history of the portfolio and shared the stories behind all holdings with me. He was willing to sell some of them, others he wanted to keep for the long run.

I remember our first meeting. We talked on the phone a few times, but it was that in-person meeting that I recall vividly. It was a winter day; I arrived early at a restaurant. When he joined me, we exchanged pleasantries and embarked on a long conversation about his career and investment preferences, and I started to see what kind of risk tolerance he had.

There was not a single stock I could say that we had to buy right away at that particular moment. Instead, I shared with him half a dozen companies that I was researching, but I mentioned that none were at the price I’m willing to pay.

I really liked that he respected it and said: “when the time is right, find room in the portfolio and start buying them.”

Over the coming few years, several things happened. We had a chance to get to know each other and share many long phone calls, dinners, and lunches. He allowed me to indulge in my investment curiosity. At times, on top of many more recognizable core positions, we’d buy some well-researched, very promising, but lesser-known stocks. He’d often say: “Tell me more about it; what do they do?”

I was always impressed how he remembered the stories, the businesses, the pivotal moments. I’d even get praise now and then when he’d notice that a particular investment finally got the attention of the general public. He’d reach out right away to tell me: “Look, look, you found it three years ago, and they are writing about it now.” He’d add: “I wasn’t sure about that one, but you were so convincing!”

I remember he called me “deliberate in my actions” more than once. It took me a minute to see that it was a compliment and what he meant by it. Everything I did with the portfolio had a good reason and specific goal. It was always clear to me why a certain stock comes or goes or how big of a position we feel comfortable holding. I think “deliberate” sums it up well.

These days, when the question if it’s the right time to start, comes up, I immediately think of this relationship, this client. When we met for the first time, I had no new ideas for him, the stock market was high, and opportunities were few. We took the time to get know each other, and soon enough, the portfolio filled up with many new ideas.

Similar stories repeated many times over the years, including early 2020 when the market offered limited immediate stock picks, followed by one of the best investment windows in years. We had new clients join us when there was almost nothing new to buy, but in a matter of weeks, we found more ideas than we had seen in years.

My mentor and partner, François Sicart, often reminds me that what we do is much more than investing. Our practice is all about building and nurturing relationships, and it’s always the right time for that!

Happy Investing!

Bogumil Baranowski

Published: 6/10/2021

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

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Catching up with friends and family recently, I noticed how there are no short and simple stories that cover the last 15 months. Any small question could be prefaced with “it’s a long story.” Some of us stayed put, some of us relocated. Some continued to travel to work; others turned our homes into offices. We’ve all seen many COVID peaks and a variety of responses to them. Though it’s been a long 15 months, with many long stories, there are at least three lessons that stood out.

The first big lesson — a surprise is just that, a surprise, and even the most informed people with a bird’s eye view of the world can miss it. Even if they see trouble ahead, it might be too difficult to acknowledge it and even more difficult to act on it. Only 2-3 weeks before the first series of lockdowns in the US, I was at a weeklong conference in Florida. I spent entire days with CEOs of the largest global consumer goods companies in the world. I heard no bells go off, no red flags; it was business as usual with an occasional mention of a virus in China.

Interestingly enough, I caught a glimpse of what’s to come after checking in with a few friends in Italy toward the end of my conference. I saw the news about COVID spread in Italy and towns under lockdowns, and I figured it was worth investigating further. Despite what I heard at the conference, I told Megan that maybe this is a bigger deal than what I believed it was. Looking back and appreciating the magnitude of the potential surprise was one of the most eye-opening life and professional experiences for me.

The second lesson, and it’s a lesson that I’ve been learning all my life – never underestimate the power of the government response. Looking at the stock market in March 2020 and watching the 30% or so decline, we knew that it’s not forever. Our team quickly assembled a list of stocks we wanted to buy, and we acted on it. We were getting quality businesses at bargain prices. I must confess this was one of the more exciting moments in my investment career. As I shared with many of you, I felt that the stocks were coming my way, and I didn’t have to chase them anymore.

That recovery could have taken a year or five years or more, but the monetary and fiscal response fired up the stock prices and shot them up 25% (S&P 500) above the pre-pandemic peak. History will judge if it was too much for too long and what the long-term consequences could be. As investors, we do our best to play with the cards we were dealt, and that’s what we have done and intend to do going forward. Nonetheless, it’s interesting to pause and reflect on how we got here.

The third lesson has been around how connected the world has become. Obviously, it started with a virus that’s not visible to the human eye going on a world tour to the most remote places where you’d think no one goes. I remember reading a story of this lone backpacker strolling into some Himalayan village bringing the one and only COVID case with him.

It’s followed by the global supply chain that’s both impressive, also somewhat invisible, but most of all immensely fragile. We have seen overcrowded ports and Suez Canal obstruction this year. I actually stood at the edge of the Canal in my teenage years, and I thought what the whole world thought this March – a global trade ocean route connecting continents couldn’t possibly be this narrow!

Finally, we have seen the incredible reach of the government policies creating waves in the economy, prices, and supply and demand. With stimulus checks, and more so, lower cost of borrowing, we see a spike in demand. On the other hand, with business restrictions, we might expect a supply constraint. Higher demand and lower supply usually lead to shortages and higher prices. Do they last? We are yet to see.

If you add to that pent-up demand, “you only live once” post-pandemic shoppers’ mindset, some anxious buying frenzy, we might see shortages of anything from ketchup, chicken wings, to swimming pool chlorine, lumber, and homes in desirable suburbs, and mountain destinations. Do too many people want to have a backyard barbeque all at the same time?

In the early days of June 2021, the world seems to be telling many stories. The US is celebrating vaccination milestones; at the other end of the spectrum, Australia is pushing for local lockdowns to eradicate a handful of COVID cases. There is a wide range of tunes in between.

The stock market collapsed and recovered, the economy and the corporate earnings went through a rollercoaster ride. BBQs are happening; masks are coming off, there is more optimism in the air in more places. I certainly hope we get to enjoy a bit more normalcy soon.

It feels as if we have lived a lifetime in those 15 months. We all have many long stories to tell, and there might be some lessons there, too.

Happy Investing!

Bogumil Baranowski

Published: 6/3/2021

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

It’s been a long while since I watched any financial news channel. That changed last week, though. I was sitting on a plane (still a rare occurrence these days). The screen in front of me was split to accommodate half a dozen talking heads. Stock quotes were running in multiple lines at the bottom and headlines on the right with some charts. I didn’t have the right headphones with me, and I couldn’t listen to it, but I felt that this silent screen was screaming at me, desperate for my attention.

From what I can tell, very few investment advisors don’t watch financial news, and even fewer will admit that they don’t. After today, you’ll know at least one. This experience reminded me of the importance of a self-imposed information diet, not just in investing but in life in general.

I have nothing against financial news channels. They can be good entertainment and an example of very creative use of the TV screen real estate.

In the midst of last year’s market crash in March, I got many calls and messages from friends and colleagues. They wanted to know if I’m watching the financial news and if I heard what this or the other talking head had to share with the public. It was a very uncertain time; the US stock market lost three years of gains in three weeks. Travel stopped. Toilet paper became a hot commodity. We couldn’t leave our homes, and the economy stood still for a moment.

I gave them all the same short but polite answer: “No, I’m not watching any news. My partners and I are going through a wish list of ideas and buying stocks every day. We see shares at 5-10 or even 20-year low prices. We are as busy as it gets.”

As disciplined contrarian investors, we live for moments like that. I didn’t want to lose a single minute watching any news; it was the time to stay focused, calm, collected, and act. There was nothing that any TV expert would say that would sway us in any other direction. I only wondered how those experts had the time to get on TV instead of doing what we were doing. We knew exactly what we wanted to buy, how much we were willing to pay, and we were on the phone with our brokers doing the work, not missing a single beat. This was the most opportune investment moment in a decade.

I couldn’t even hear the six talking heads on my small screen on my flight, but the headlines were loud and clear. Apparently, we were all bracing for earnings of some particular company reporting after the market close. I just settled in my chair, and I wasn’t planning to brace for anything until the pilot advised otherwise. The terminology used reminded me of a horse race, boxing match, football game, or a space rocket launch gone wrong. It alternated between allegedly unbelievably good news and unexpectedly terrible news all in no time.

Buy, sell, panic, cheer — all mixed together. I learned that there are some actionable trades to do in the morning and others in the afternoon, and there is halftime to regroup. I change my mind too, but I never have six opinions about the same thing in a single day. I had to buckle up and brace myself for an emotional rollercoaster that lasted only a few minutes until I turned off the screen, picked up my book, and enjoyed a quiet flight.

I was reading Bill Bryson’s – “The Body, A Guide for the Occupants.” I enjoyed his “Walk in the Woods,” where he shares his adventures on the Appalachian Trail. Megan and I hiked sections of the Trail last spring and summer.

This loud news experience was no surprise to me. It was more of a reminder of the importance of a self-imposed information diet. I mention it in many posts; I even gave talks about it to groups of investors over the years. In investing, the environment that one creates for oneself matters as much or more than skills, knowledge, and experience. It’s not enough to know what to do; it’s as important to be able to think for yourself and act on it.

For many years, running around New York City from the office to lunches, events, and back, I’d see those silent, loud, tiny screens everywhere from the elevators to conference rooms and even kitchens. One office building, I remember, had Disney cartoons for a change. That was refreshing.

When a friend asked me recently if I watched the financial news channel this morning, I said no. He asked if I am living under a rock. I guess you could say that I have lived under a rock for over a year now. Megan and I spent half of that time in the deep woods with great Wi-Fi but no opportunity to see an elevator TV screen and the second half wasn’t that much different with a quaint seaside town as a backdrop. I’ve had an incredible amount of time to read, write, and think, though, more than at any other point in my life.

William Deresiewicz, a former Yale professor and author of a thought-provoking manifesto “Excellent Sheep: The Miseducation of the American Elite and the Way to a Meaningful Life,” shared in a speech at West Point in October 2009: “Thinking means concentrating on one thing long enough to develop an idea about it. Not learning other people’s ideas, or memorizing a body of information, however much those may sometimes be useful.” “If you want others to follow, learn to be alone with your thoughts.” – he concluded.

I treasure my quiet thinking time with no news, noise, or distractions. I’m immediately reminded of Sir John Templeton, the legendary investor who moved from Manhattan to the Bahamas in the 1960s. He did just fine reading the Wall Street Journal that arrived a few days late on the island. He shared how being away from the noise helped his thinking and investment results.

I have a laptop; I get the news. I read a lot. I take a good number of calls each week, but I value my information diet, otherwise. In investing, patience and discipline can be developed and nurtured, but neither is infallible. I make my life easier, and tune out of big swaths of noise out there, so I can hear myself think. Never watching the financial news is just a small part of it. It makes for more enjoyable flights, helps my quality of sleep and (hopefully) improves my investment choices as well!

 

Happy Investing!

Bogumil Baranowski

Published: 5/6/2021

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

What are “phantom losses?” — In investing, we have gains and losses, but how many types of both are there? Last summer, I wrote a short article about two types of gains. Some recent conversations with clients, colleagues, and fellow investors made me realize that there are more than two types of losses. There are realized losses, unrealized losses, and apparently also “phantom losses.” I like to learn new things, and this was definitely a bit of a discovery. I felt compelled to share it with you, so here it is!

I don’t think you’ll find the term phantom losses in any investment manual, not in this context at least. It’s the best label I could find for this third category. Let’s start from the beginning, though, and examine the two more obvious, yet still at times, confusing types of losses: realized and unrealized losses.

Every stock we buy, we buy with an intention to make money. If we ever sell it, we’d like it to happen at a higher price than we paid. The world is too complex, the future too uncertain, and the information we can gather too imperfect to make every single investment a success. We know it, we accept it, and we prepare for it. The best we can do is minimize our losses, which helps us maximize our net gains. At all cost, we attempt to avoid a permanent loss when a particular holding turns out to be worth nothing. We call it avoiding zeros. In recent history, we have managed to avoid this unpleasant experience. We want to keep it that way.

What happens, though, when we make an investment, and the investment case doesn’t hold anymore. Enough might have changed in the meantime that we see low odds of the business regaining its footing and our purchase turning out to be profitable. In this situation, we decide to sell the position and realize a loss. It’s usually better to act quickly before too many fellow investors embrace the new, less attractive reality.

This is the kind of loss that we call a realized loss. The stock gets sold, and we move on. There might be some tax benefit of such a loss for the client, but that’s as much we can gain from it at this point, apart from a potential lesson for the future.

After we buy a stock, it may happen that the price drifts lower, and we are looking at unrealized or paper losses. We are waiting for a recovery, and the investment case is still valid. We don’t worry about a paper loss. We tend to look for companies whose stocks are down, cheap, and out of favor. Their prices might still be dropping for a while before we see any improvement. If anything, this offers an additional buying opportunity. That’s the very reason why we buy slowly and build the position over time. An exception to this approach would be last year’s March sell-off when we had a brief but very attractive buying window, and we had to act fast.

The first two types of losses are a part of our investment process, not all stocks will perform as expected, and we may have to sell them, or it could take our holdings a while to perform, and we may need to tolerate those paper losses for a bit.

Phantom losses are a category of their own. I think I was always aware of their existence, but I never paid too much attention to them, and I don’t expect it to change in the future. Either way, I believe it might be a good time to discuss them in more detail. With the stock market hovering close to all-time highs, there are possibly very few unrealized losses in the portfolios. The focus moves to everything that’s not in the portfolio. In times like this, market enthusiasts can be full of regrets. That’s the fear of missing out (FOMO) territory: “If only I bought this stock five years ago or even a month ago, then I would have had this much more today.”

There are many stocks and other investments that we never bought and never considered buying, but their prices rose. They might feel like a missed opportunity to some. These could also be stocks we considered and chose not to buy, but their prices rose, and finally stocks we decided to sell, but their prices rose even more.

The world of FOMO is big and has no limits. There is no better fuel for it than watching others get rich. J.P. Morgan, the legendary 19^th Century Gilded Age banker, once said: “Nothing so undermines your financial judgment as the sight of your neighbor getting rich.”

As much as we are aware of phantom losses, they are outside of our immediate attention. There are thousands of stocks out there, there will always be many that go up for various reasons, but we would never feel comfortable holding them.

We continuously review our investment cases for stocks we bought, we hold, we sold, and we passed on, it helps us sharpen our approach, but we don’t waste much attention or energy on the opportunities we “missed out” on.

We keep it simple. We are happy as long as we can accomplish our investment goal within our chosen investable universe. Our goal is to keep and grow over the long run the family fortunes we manage. There is a lot we can do though to minimize even the phantom losses though. Our investable universe is not set in stone, and we have owned many companies that initially were outside of our original stock universe.

What’s more, we prefer to act gradually, both buying and selling stocks, but especially selling. This particular policy allows us to avoid leaving too much money on the table if a stock we own continues to rise beyond our expectations. We call this approach being a value buyer but a growth holder. We do our best to buy them right, but then we let the winners run.

Bottom-line: we focus on two types of gains, and losses, realized and unrealized. As much as we’d like to have all gains and no losses, that’s not the investment reality. We do our best to maximize the gains and minimize the losses. We know that regrets and the fear of missing out are a dangerous combination in investing and can make us blindly accept much higher risks for elusive rewards. Let’s remember, though, that phantom losses are just that — phantom, and watching our neighbors get rich might get in the way of our financial judgment.

Happy Investing!

Bogumil Baranowski

Published: 4/22/2021

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs, and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector, or the markets generally.

Last week, my wife Megan and I enjoyed the company of a German-Brazilian couple who also found refuge in our quaint seaside town. They sail and surf and have navigated the COVID travel realities getting stuck places and changing plans quickly. We compared notes and shared our experiences. We thought we pack light, but they pack even lighter. Megan brought up the topic of searching for what’s essential in the last 12 months. Beyond health, family, friends – what else is truly essential?

It made me think of a book I was reading in the early days of our work from home experiment with the stock market experiencing 4%-plus swings up and down daily, the pandemic anxiety peaking in our household – “The Power of Less: The Fine Art of Limiting Yourself to the Essential…in Business and in Life” by Leo Babauta – a blogger, and author focused on productivity. It offered a very helpful framework for the year ahead.

Before 2020, I never had to wonder what I would take with me if I had to pack for one year or two? What is that essential? Last year, I had to do it twice, first in my office of four years and then in my city apartment. This experience set the tone for the following months, and it had an immense impact on how we live, work, and invest.

In early March of last year, I called off my business trip. I took a cab to the office; I packed all I needed. I scanned some checklists, to-do lists; I uploaded some files to our cloud storage, and I left. It’s been over a year! That’s the longest time in my adult life that I haven’t worn a suit, by the way.

A month later, Megan and I went through a similar experience leaving our apartment. We had a tight schedule. Our move to a remote cabin in the woods was a very last-minute decision. We could only take what would fit in the trunk of our car. Eventually, we ended up with even less catching a flight to our current destination.

It wasn’t just the office or our home that required a refocus on the essential. Our investment approach also experienced a similar minimalist moment. From going into the market correction in March 2020 to riding out the quick recovery and rally in stocks, we had to double down on the highest conviction holdings, promptly sell what proved to be “dead weight,” and leave room for further buying opportunities, which followed later in the year.

It’s been a time for bold, decisive moves, and the path ahead was far from clear. As you may remember, we had been cautious about the markets for a while. We were fortunate enough to go into the 2020 correction with what we considered to be ample cash, market protection (a volatility ETF (exchange-traded fund), and a gold ETF), and already well-selected core holdings. When the stock market lost about 1/3 of its value in March, we knew that the timer is counting down quickly, and we must act fast. We bought many holdings at their lowest prices in many years. This massive reshuffle in the portfolios allowed us to benefit from the recovery that followed.

When it comes to our investment and research process, I noticed how the last 12 months made us focus on what’s essential. In March, April, and May, we had lots of work to do in a short period of time, and it set the tone for the rest of the year as well. I cleaned up my email inbox, unsubscribed from a lot of non-essential newsletters. I turned off the news alerts on my phone. I narrowed my information consumption only to what really helps me keep up with what’s going on and allows me to do a better job, but nothing more. I built a more efficient daily routine with ample time to read, write, take calls, listen to a podcast or two. I cherish my big blocks of uninterrupted deep work.

Without the daily commute, I even found time for some more regular physical activity, reading for pleasure, or even learning another language. If you can keep a secret, I’ll tell you that I also nap now, and then, that’s something I craved for years but couldn’t really do in the office. Since I often start the day with a sunrise surfing session, a quick power nap midday helps me recoup my energy. It does magic to my productivity and focus, too.

Our experience tells us that there is never a dull moment in investing, and we always have to be prepared to be surprised. When that happens, though, we like to think that we are positioned to be the least wrong no matter what cards we are dealt. That’s been the goal going into 2020, that’s the goal in 2021, and that will remain the goal when the pandemic is far in the rear-view mirror.

Today though, might be a good time to pause and wonder what’s essential – in life, work, and investing.

 

Happy Investing!

Bogumil Baranowski

Published: 4/1/2021

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

Kicking the Tires: The Future of Due Diligence

I remember sitting in a pilot seat of a massive Boeing 777 cargo plane. It was just me with no co-pilot by my side. I wrapped my fingers around the control yoke; I reached for the throttle with my right hand. In my mind, I was ready for takeoff. It wasn’t a dream! It happened almost a decade ago. As a small perk of my research work investigating companies, I got to visit the FedEx facilities in Memphis, Tennessee. I shook hands and exchanged pleasantries with the founder and CEO, Fred Smith. Then I joined a group of portfolio managers on a small bus to the airport. I love planes and airports; they didn’t have to ask me twice. We got to see a new Boeing 777. We were kicking the proverbial tires and doing our due diligence, and those were some big tires to kick! If you know the smell of a brand new car, I’ll tell you that a brand new Boeing 777 has a distinct smell, too.

This was also the very airport where Tom Hanks’ Cast Away character Chuck Nolan was welcomed back by the very same Fred Smith, who at first had some doubts about having FedEx featured in a plane crash movie.

Funny enough, I was in the process of getting my private pilot license at the time, which allows me to fly single-engine propeller planes, no big jets (maybe one day). To raise my instructor’s blood pressure, I had someone snap a photo of me in the cockpit of this big cargo plane, and I sent it to him saying I’m on my way and asking if he has room in the flight school’s hangar. Flight instructors don’t joke much, neither does Tom, but I think he appreciates my sense of humor now and then.

In my recent conversation with a dear friend and mentor – James (Jay) Hughes (who has spent a wonderful career working with prominent families around the world in his role of a true homme de confiance), we discussed the future of due diligence in the investment process. We talked about due diligence in the COVID and post-COVID era. What will the world look like, we wondered.

I might have researched thousands of companies in my career, I met countless CEOs, and I kicked a good number of tires, big and small. In flying and investing, I live by checklists. Before each takeoff, a pilot walks around the plane and actually touches and checks vital parts. Tom would jokingly ask: “Will it fly?” I never said it, but I always thought that a better question would be whether it will crash!

As investors, we have incredible access to disclosure that the listed companies are required to share with the public. It wasn’t always this way, but over decades, the amount of information and reporting frequency have improved. I still think that US-listed companies are among the best in the world on that front. This gives investors in US equities a great advantage and more comfort.

Outside of the US, it can be a bit of an adventure trying to get a complete picture of the business and knowledge of the local market, and access to local research might be very helpful. Otherwise, a US-based investor might be at a disadvantage. We often lean on outside resources to fill in the gaps in our due diligence.

We have a rich network of connections built over decades of experience. We are a Zoom call away from someone on the ground, almost in any significant economic hub in the country and the world. These are our proverbial boots on the ground; somebody can do the kicking for us. It has proven especially important when travel is almost impossible these days.

Speaking of international travel, early in my career, I hopped on the plane and took a red-eye flight to Brazil. It was a big adventure for a junior analyst. I spent a week with a few fellow investors visiting companies in Sao Paolo and Rio. I also met with local research firms that help outside investors navigate the markets there. I was a bit envious of their office views in Rio with vast beaches as far as the eye could see. I’m still in touch with some of them.

The last time I met with CEOs of some of our holdings was a little over a year ago, two short weeks before lockdowns in New York City. We talked, we mingled, we had coffees and lunches. This year, the same event was hosted exclusively online. The amount of disclosure and information was the same. We missed out on some of the in-person experiences.

When I think of due diligence, I think of the many investors I met in my career. Their takes on due diligence couldn’t be more varied. Some go almost as far as counting the bags of frozen peas in the freezers or measuring foot traffic camping out by the store entrance. Others insist on never meeting the management or visiting the company; they believe that’s the only way to preserve their independent think and avoid being influenced by a charismatic CEO.

I believe we belong somewhere between the two. I like to think it’s challenging to invest in a business without firsthand experience with the product or service or access to someone who has had such an experience. I do believe that some CEOs have a true gift for inspiring their troops and “seducing” shareholders, bringing everyone on board their grand vision.

I personally prefer those executives who underpromise and overdeliver and tell me how things really are. I like to have enough mental space and emotional distance to make up my own mind about the business without too much embellishing. After all, I always would rather have our CEOs grow and expand their businesses than spend too much time at too many investor events.

The more confidence I have in the disclosure I receive, the less tire kicking is necessary, in my opinion. As a rule of thumb, if any investment calls for excessive due diligence, I immediately think that we might be better off moving on to the next one. If it takes so much to convince us to buy it, how much more will it take to make us keep holding it.

Between my trip to Brazil and shaking hands with FedEx’s Fred Smith, I had many opportunities to meet talented executives running incredible businesses. At times, I’d meet the same CEOs who ended up managing more than one company we held. In a way, we followed them on to the next business. I only had a handful of encounters that convinced me not to invest in a company. I can’t say it was a surprise. The meeting confirmed what I already thought after a careful study of all the available information. There were maybe three that stand out. In a few short years, all three ended up with fraud, investigation, and a collapse of the stock price. I didn’t need to shake anyone’s hand or kick any tires to see it coming. If the story is too good to be true, it never is.

When it comes to due diligence, if I don’t feel comfortable with the investment after all my reading, the meeting won’t make me change my heart; it never has. On the other hand, if I like what I’m learning, studying all the materials, kicking the tires, and shaking hands or speaking on a call with someone close to the story can give me a bigger conviction. It is the latter, though, that can make more of a difference. A potentially small position in our portfolios can become bigger because of the extra mile we go with our due diligence.

Due diligence has been helpful not necessarily in eliminating bad investments or investment “crashes,” but rather in helping to make sure we own the stocks that have the ability to “fly”!

I can’t tell if handshakes will be around in the post-COVID era, maybe there will be elbow or fist bumps, but the due diligence will be around. I think some of it might be done over Zooms instead of in-person; maybe we’ll rely more on our network or resources with boots on the ground. One way or the other, we’ll still want to get to know our holdings and the people who run them. I believe that in-person occasions won’t completely go away, but they might be more rare and special, and they will be valued even more highly.

I don’t know if I will get to sit in the cockpit of a 777 anytime soon, but I’m looking forward to seeing the future of due diligence. It might be a less-discussed aspect of the investment process, but it’s crucial, and it may have to be redefined and adapted to this new, much more remote, and dispersed world we live in. Lastly, I had my own 2020 wedding with an all virtual audience (except for my in-laws and my bride); I think I’m ready to have my imagination stretched when it comes to many aspects of investing, including the post-COVID due diligence!

 

Happy Investing!

Bogumil Baranowski

Published: 3/18/2021

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

Last month, the New York Stock Exchange president penned a historic opinion piece in the Wall Street Journal with an attention-grabbing title: “The NYSE Isn’t Moving—Yet.” The author shared how the new local tax ideas could force this over 200-year-old New York institution to find a new home. NYSE wouldn’t have had this kind of freedom of location independence had the last 12 months of remote work never happened. He writes: “We’ve proved, by pandemic-driven necessity, that we can close the physical trading floor on a moment’s notice and maintain service without missing a beat. Similarly, the broader financial services industry shuttered offices and shifted workforces, without hiccups to remote locations.” – we can’t help but notice that something immensely important has changed.

With the first anniversary of the biggest ever experiment in remote work upon us, I recently took on the topic of this possibly most significant disruption of our lifetimes. As a contrarian at heart, I would have been slightly disappointed if it hadn’t stirred a mild controversy. I have received a wide range of reactions, and I felt compelled to add at least two more cents to the discussion.

***

The Remote Work Revolution is a bottomless topic. We are just learning what it could mean for us as business owners, investors, employers, employees, consumers, or just people, human beings. I think there are some already obvious and even more yet unforeseen consequences of this new phenomenon.

There are at least three big themes here that I’d like to follow-up on 1) The Talent, the People, 2) The Office Space Conundrum 3) Inter-Company Dilemmas.

The Talent, the People

I have no doubt that the companies that will win in this new work/life revolution are those that will be the most agile, open-minded and that put people first. I remember a CEO tell me once that his biggest assets leave the office at 5 pm. Today those assets are dispersed and free to roam.

We already see many new and old businesses that emphasize freedom and flexibility and meet the talent where the talent wants to be, live, and prosper. I see some faint voices from a smaller group of executives whose tone is the polar opposite. They call work from anywhere an “aberration to be corrected  as soon as possible.” I got chills hearing it because it sounded more like something I would have heard on TV growing up in 1980s Cold War Poland rather than in the 21^st century United States of America – “The land of the free and the home of the brave.”

Some executives say they will apply “a carrot and stick” method to round up employees back to the desks. In the 19^th century English-language literature that’s a reference used to describe donkey races with a jockey using sharp and painful blackthorn twigs to motivate his steed (archaic: a horse being ridden). I have one word for them: yikes!

You don’t have to ask me twice who I’d rather work with or invest in.

I immediately think of what a Georgetown University professor told me almost twenty years ago: “people will vote with their feet.” If you have one company that insists on hiring only those in the commuter radius of their office, while the other company spreads its arms wide-open to all talent no matter where they choose to live — it won’t take long to see whose employees will be happier, healthier, and more productive, and who will get a competitive edge here in no time.  It’s the 21^st century, and the best talent is independent, free, brave, and has the ability to dictate the terms of employment.

The Office Space Conundrum

It’s fairly obvious that office space needs are about to shrink, and if not for the multi-year leases, we’d see a lot more of it already. Most recently, Conde Nast the publisher of The New Yorker and Vanity Fair refused to pay rent at One World Trade. Last year, Pinterest chose to pay to get out of their leases. NYSE might think it doesn’t have to be in New York City, but there are companies that go a step further and believe that they don’t need an address to do business and even get listed on the stock exchange.

On the other hand, if you are fortunate enough to have a profitable business with a multi-year lease, you’ll likely wait until the lease is up to rethink your needs, and my guess is that they will be even smaller in 5 years than in 1 year. The last 12 months showed that we definitely need a reliable laptop and strong Wi-Fi, but we can surprisingly easily get by without an office with no apparent loss, quite the opposite.

I think the landlords will see delayed consequences of remote work. The best they think they can do right now is demand the profitable tenants to honor their leases until they expire. It doesn’t sound like a sustainable business practice to keep any customer, including a tenant, and expect him or her to pay above-market rates for something he or she doesn’t need or use. Those customers remain captive for as long as they have to, and once free, they’ll act, too.

If rent is often (outside of earlier mentioned talent) the single biggest line expense for many businesses, I can only imagine what it means to reduce it. The cost of starting and running a business drops significantly, and the profits end up in business owners’ pockets (where they belong) rather than the landlords’ who happen to own a formerly prime location.

In investing, it pays to see where the proverbial ball will be, not where it is now. When it comes to commercial real estate, office spaces, in particular, it’s not that hard to see where the ball is headed.

The Inter-Company Dilemmas

I heard opinions shared by experts about the possible demise of the informal side of work in this new remote work world. One of the pundits remarked how much used to get done within companies outside of the formal channels relying on favors.

I have researched many businesses in my investor lifetime. I would be hugely worried if any serious business operated exclusively or predominantly relying on informal favors, lucky run-ins. If anything, I witnessed how the last 12 months have formalized processes to make sure that nothing falls between the cracks. Communication channels have been established and improved. Paper-shuffling has been effectively reduced to zero.

As a firm, we have had several big advantages; we have operated remotely at times before. We have a small but mighty tightly-knit team. We also had a chance to build a business structure from scratch, and select software, tools, platforms, and service providers that could potentially allow us to work remotely. We knew we are building a 21^st-century investment firm. I was invited to speak on the topic over two years ago at a remote work conference.

Becoming independent and starting a new company in 2016, we made a deliberate decision to focus on what we do best: investing and serving our clients to meet their needs, while we outsourced everything else from IT, accounting, compliance to trading, and reporting.

Things get done at Sicart Associates, not because of a lucky run-in with a colleague from another department; there is a process, it’s followed and completed.

We might be a mighty team of seven, but we have strong, dedicated teams work for us at half a dozen service providers who value our business and who stay on top of their game in their respective fields. All seven of us are working remotely, and all those outside teams have effectively worked remotely for us for years, and only now they are remote from their own offices and often dispersed around the country and at times the globe. One late night I had to address a software glitch, and the service provider’s Tokyo team stepped in to handle it and walked me through. I couldn’t help but be amazed and impressed. That’s how problems are solved by serious businesses.

I think the remote work revolution showed which companies have their act together, systems, and processes in place, and which are bursting at the seams holding the show together with the informal arrangement and favors.

To conclude, Warren Buffett famously said: “I am a better investor because I am a businessman, and a better businessman because I am an investor.” I’d count my last four and a half years as a partner of an investment firm, a business owner as very formative, and greatly helpful in my investment career.

I’m convinced that the remote work revolution is shaking up structures, assumptions, and routines that have been stagnant way too long. In the spirit of Nassim Taleb’s book “Anti-Fragile,” some prosper in moments like this; others call it “an aberration to be corrected” with “a carrot and stick.”  The biggest asset for all forward-looking companies is talent. The talent craves freedom and flexibility. Before investing in a company, soon enough, I’d expect that I won’t even need to ask about their remote work policy anymore. Everyone only with “a carrot and stick” in their hands will have either caught up or gone out of business, losing to a much more agile and open-minded competition.

The NYSE president’s WSJ opinion piece is one for the books. It made us think that something important has indeed changed. As investors, business owners, and human beings, we notice it and pay attention.

Happy Investing!

Bogumil Baranowski

Published: 3/11/2021

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

The first anniversary of the biggest ever experiment in remote work is around the corner. It might be the right time to see what we have learned about this possibly most significant disruption of our lifetimes.

***

Megan and I are staying now in a quaint Caribbean fishing town a few hour flight away from our New York office. When it comes to time zones, I’m equidistant from the West Coast and London, which has been very convenient taking calls, and Zooms. In the morning, I’m more likely to see returning happy fishermen than running frantic commuters. I’m definitely outside of the traditional daily commuter radius. I’m working remotely, and our whole team is working remotely. All we need is reliable high-speed internet.  Maybe it would have been feasible years ago, but today, it’s not only feasible; it has become second nature and increasingly common practice. What happened?

***

In our role as investment advisors managing family fortunes over generations, we pay careful attention to the world around us. We know well that change is the only constant. We are especially curious about the sudden unexpected disruptions that may have far-reaching consequences creating challenges, and offering opportunities. The remote work revolution of the last 12 months has made it to the top of the list of the new phenomena we are watching.

***

Work is what you do, not where you go – that’s what I heard at a remote work conference over two years ago. I met hundreds of remote workers and digital nomads who relied on technology to live wherever they choose and however they choose. They were living the post-daily commuter life. It looked like the ultimate freedom to me. I wondered why aren’t more people following their path? And if they did, wouldn’t it be the biggest disruption of life and work in recent history? Maybe even the biggest lifestyle upgrade? What would it do to how we live, work, invest, how companies do business, where consumers shop, and more? Almost nothing seems to remain the same when the office worker is freed from the desk and chooses never to commute again.

Rory Sutherland, the UK-based Ogilvy executive, commented on remote work in the Spectator last month, saying: “Given that this technology might help solve the housing shortage, geographical inequality, intergenerational wealth inequality, the transport crisis, the pensions crisis, the environmental crisis and almost everything else people worry about, it seems odd that it attracted so little consideration until a pandemic forced our hand.”

We don’t have any control over when we are born, but I happen to have been born in what felt like the last five minutes of a failed ideology, outdated way of storing and transmitting information, and an archaic way of working. The fall of each led to more freedom in the lives of individuals and solved many more problems than we could have imagined. Let me explain.

I got to witness the last decade of a failed experiment of a communist regime in Poland, which deprived people of most of their freedoms from owning a business to sharing their views. So many people spent so much time making sure that nobody does or has anything. The fall of communism was a massive disruption. It unleashed an incredible potential in the former Soviet Bloc in Central and Eastern Europe.

Later as a college student, I felt that I was the last to print, scan, mail, and receive paper. Was I studying or shuffling paper — I wondered at times. My school materials, applications, dossiers were all paper. The fall of paper has changed a lot. I remember taking only a thumb drive with me when I was moving to New York City. Today, it’s all in the cloud, available where I happen to be. From millions of trees saved to a lighter, easier living, the paperless world has been a blessing.

Finally, the fall of the daily commuter culture can prove to be possibly the biggest, the most universal, and the most far-reaching disruption of our lifetimes. Office worker commute is such a bizarre concept. We took the 19th century Industrial Revolution era mindset and kept it with us all the way to the 21st century. Offices are not manufacturing plants; they have no physical assembly lines. It’s just rows of computers with hopefully decent Wi-Fi.

The belief that work is where you go, and our source of income and living is physically attached to a particular location could be much older than two hundred years. What if it all started during the First Agricultural Revolution around 10,000 BC. In a fascinating book, “Sapiens: A Brief History of Humankind,” Noah Yuval Harari writes: “The new agricultural tasks demanded so much time that people were forced to settle permanently next to their wheat fields.” If it’s really been that long, no wonder we have such a hard time shaking it off and dropping outdated assumptions about office work.

With no assembly line to attend or wheat fields to weed, for the first time in history on such a massive scale, we are finally free to decouple work permanently from the physical location.

Over 15 years ago, the renowned psychologist Daniel Kahneman “discovered” that commuting is the number one least enjoyed daily activity. That’s a polite way to put it. Annie Lowrey was much more direct, and on May 26, 2011, in the Slate article called commuting: “a migraine-inducing-life suck.” She quoted various studies and explained how long commutes cause obesity, neck pain, loneliness, divorce, stress, and insomnia. Wow! And why are we doing it?

If we accept that work is what you do and not where you go, everything changes. We save an incredible amount of time, energy, and resources. Statistically, an average commuter spends twice as much time commuting as vacationing.

Rory Sutherland adds in his article in the Spectator: “Digital networks, unlike hub-and-spoke road, rail and airline networks, deliver their benefits equally to everyone connected to them, regardless of their location.”

With remote work, we can live almost anywhere we want, however we want. We can hire talent from almost anywhere. We can find new business almost anywhere. I say almost because there is still a lot of red tape in the way of what Derek Thompson from The Atlantic called “the nowhere-everywhere future of work.”

That’s not all; the end of commute means a healthier, cleaner planet. Quartz wrote in late 2020: “No single activity contributes more greenhouse gas emissions than driving to and from work.” In 2020 we also saw the most reports of smog-free days in major cities and a comeback of wildlife to urban areas, including New York City’s Central Park. That’s where the rare snowy owl decided to return for the first time in 130 years. As a species and civilization, we might have done more for the planet in a single year than ever before, all by doing one thing: ending the office worker’s daily commute.

I’m reading how there are 18 countries in the world that already offer remote work visas. That number doubled in the last 12 months alone. I’d imagine it will keep doubling until everyone is on board. Most of those countries happen to be in pleasant climates, although somehow the island nation of Iceland made the list, too! There is something for every taste: from warm to cold. You bring the job with you; they let you live there. It’s not only countries that are jumping on board; some US states are even willing to pay remote workers to move there.

The way we think of taxation is evolving, too. Several states, including New York’s neighbors, are looking into ways to tax remote workers who no longer commute but rather live in the state and work from home. New York City was worried about the three hundred thousand taxpayers who permanently skipped town, but maybe another worry is the neighboring states’ appetite for a piece of the tax revenue pie. New York is not alone; other major hubs are going through a similar challenge. If employees no longer have to report to a particular zip code and can live wherever their heart desires, the cities face a real challenge.

I’d hope the tax authorities will be smart working with remote workers and attracting them rather than scaring them away. The one thing this newly freed from office crowd can do is vote with their feet and walk.

More companies are switching to all-remote work already without waiting for the pandemic to pass. Some even offer a stipend to set up a home office. The office-free, office-optional world makes doing business much easier. Many startups used to spend a fortune securing prime office space to impress investors; now, they can use this money in more productive ways. For many businesses, office rent is the biggest single-line expense. With smaller needs and footprint, it could lead to significant savings and lower the cost of launching and running a business. I agree with the opinion that a hybrid model could prove to be a complete failure. If employees are expected to be in the office a day or two a week, they are still tied to the office location and cannot enjoy the freedom of working from anywhere. Sid Sijbrandij, CEO of code-collaboration firm GitLab, explains how the old work model rewards attendance rather than output, but it’s the latter that really matters.

It’s fascinating that the same companies that enable remote work with cloud services, communication tools, and computing devices are also the ones that seem to have completely missed the memo! Some of the big tech companies only recently completed or started building colossal campuses; many of them are the size of multiple Vatican Cities. Who will be commuting to them to get free potato chips, use sleeping pods or play some ping pong? It’s as if someone was trying to lure new employees with fancy staplers in a paperless world. Some Silicon Valley executives notice the change themselves. Salesforce president and chief operating officer recently said: “An immersive workspace is no longer limited to a desk in our Towers; the 9-to-5 workday is dead, and the employee experience is about more than ping-pong tables and snacks.”

I also don’t think that the gray rows of dark cubicles with fluorescent lights high above them will be of much use in this post-daily commuter world. I’m somehow still not convinced that this is the place where creativity and productivity blossom. As a matter of fact, Inc. magazine’s article “Is the Office Dead Forever” explains how 80% of US workers said they’re just as productive or more productive working from home.”

In the book “Remote: Office Not Required” by Jason Fried and David Heinemeier Hansson, they write how remote work used to be rebuffed in the name of no special privileges for anyone. They jokingly write: “It simply wouldn’t be fair! We all need to be equally, miserably unproductive at the office and suffer in unity.” That’s the kind of tone I’m hearing from the faint return to office (RTO) voices these days. These voices come mostly from landlords whose empty office buildings might need to find a new purpose in the future instead of hoping for armies of suit-clad commuters (like me) to report back. The reality is very different. Only 1 in 10 companies expect all their employees to be back in the office once it’s safe.

I know, I know — not all jobs can be done remotely, but let’s look around and appreciate how many jobs can and have been done remotely in the last twelve months. The University of Chicago reports that “37 percent of all jobs in America can be done entirely remotely,” and they account for almost half of all income earned! If it’s not a game-changer, I don’t know what is. That’s a staggering number on the move, free to roam, decoupled from the office location. For tax collectors, it’s a fleeing tax base; for businesses, it’s an office-free or office-light cost structure, and more mobile consumers that still need services and goods but might want them somewhere else; for employees, it’s a whole new world of opportunities.

I do not doubt that we will have in-person social interactions in the future beyond COVID and apart from video calls. I think we’ll value them more highly than ever before. Humanity has been worried about missing out on in-person experiences for at least 2,500 years. It predates the water cooler talk and goes as far back as the village water well tête-à-tête. It was then when Socrates discussed the challenges of the written word, which he believed can’t possibly be as good as the spoken word. Lane Wilkinson explains that according to Socrates, the “written word stands as a mute testament, incapable of explaining itself beyond the text presented.” I don’t disagree, but it’s so much better than nothing! I have never had a chance to attend any of Socrates’ live lectures, but I’m grateful someone wrote them down since he didn’t author any texts at all.

Fortunately, the written word has traveled through time, and now it travels in no time across the globe. I think even Socrates would have been impressed with what Zoom calls have meant and done for us on the family, friends, and business fronts the last 12 months. The same as writing hasn’t completely replaced the spoken word, Zoom won’t replace all in-person social interactions, but something tells me that both the written word and video calls are here to stay.

Long before the pandemic, I read a few books about remote work. One of them was the earlier mentioned “Remote: Office Not Required”, the other “Remote Revolution: How the Location-Independent Workforce Changes the Way We Hire, Connect, and Succeed” by John Elston.  I read them both when I was writing “Money, Life, Family: My Handbook: My complete collection of principles on investing, finding work & life balance, and preserving family wealth.” Both made a very convincing case in favor of remote work not long before the 2020 work from home days. In the former, the authors write: “The next luxury is the luxury of freedom and time. Once you’ve had a taste of that life, no corner office or fancy chef will be able to drag you back.” In the latter, I read: “The Remote Revolution allows employees to choose both their best life experience and their best work experience, not one or the other. It’s a game-changer.” When I read it, I couldn’t argue with either, and I definitely can’t today.

The biggest difference between now and the pre-COVID world is the adoption rate. There were remote workers before, and there were tools to work remotely available. Still, it was hard to convince others when 20 people are ready to start a meeting in a stuffy conference room, and you ask if you can call or video in from where you happen to be living these days. Now, in many case, everyone is calling in, and that’s the only way to join the meeting, and the best part is – no one cares anymore that you are not at your desk or where you really are.

Our 2020/2021 work from anywhere experience was probably the most rushed way to get acquainted with this new world of possibilities. Rushed or not, it is what it is. Many have tried it; some loved it, some needed time to warm up to it, some will likely fight it and try to reject it.

Once we leave the pandemic inconveniences behind and embrace what remote work means beyond it, we might wake up to a very different world. Someone told me that if you liked the COVID era remote work, you’ll love it in the post-COVID times. I agree.

We have yet to rethink the legal, tax, immigration, business, social, and other frameworks for this new remote work revolution. We learned how to hunt animals many times our size; we discovered flight, we put men on the moon, I have no doubt, we’ll figure this out, too. Some already call it potentially the biggest lifestyle upgrade in a century. Many tell me they can finally see their kids grow up. Others have “Sunday scaries” at the thought of being called back to the office. I think we are witnessing possibly the biggest, the most universal, and the most far-reaching disruption of our lifetimes. We can fear it and resist it or embrace it and benefit from it.

I think the proverbial cat is out of the bag. We can’t pretend that 2020/2021 remote work revolution has never happened.

The ideology I grew up with is almost gone, the paper culture is disappearing, and finally, the commuter life is fading, too. I’m very curious to see how many new investment opportunities this remote work revolution will create. It’s already shaking up structures, assumptions, and routines that have been stagnant way too long.

 

Happy Investing!

Bogumil Baranowski

Published: 2/24/2021

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

The last twelve months brought many new exciting IPOs; new companies got listed on the stock exchange and made their shares available to stock investors. Not all of them seem as promising as their prices would imply. They got me thinking of a conversation I had a few years ago when I met an enthusiastic entrepreneur. He started a venture, which provided a service that the local community enjoyed. The economics didn’t work, though. There was no profit. His solution to the problem was getting more investors. He openly admitted that profit is not the goal of this particular entity. Hearing that, I suggested he turns it into a non-profit and accepts donations. He laughed and said – “No, no, I want to grow it and sell it.” Interestingly enough, I believe that’s the mindset of too many entrepreneurs these days. Why earn a profit if you can grow it and sell it?

Whether it is a cupcake shop with whimsical frostings or a cloud computing service provider with a cheeky name, a venture becomes a business if it currently makes a profit or has a clear path to profitability in the not-so-distant future. If profit is not the goal, it’s either a hobby or a non-profit. There is nothing wrong with that. The former gets funded from the hobbyist’s pocket, and the latter – the non-profit lives off donations, often tax-deductible donations. There is a whole variety of non-profits providing services to communities around the world, from organizations buying books and pencils for students in need to major museums and more.

In this new brave tech world, though, we have a whole new breed of ventures that disguise as businesses, but when you look closer, they resemble more non-profits. In the very competitive, very innovative world we live in, all entrepreneurs have a significant challenge in front of them. They need to identify a new or an existing profit pool. If it’s new, it may be potentially easier to capture it; if it’s an existing one, a battle with an incumbent is inevitable.

There are non-profits in the online tech world, too. Among the most well-known is Wikipedia. An incredible service that took encyclopedias online and made them permanently editable and current. I must admit that I spend a disproportionate amount of time on Wikipedia researching bottomless topics for both work and pleasure. It’s 20 years old and available in 317 languages. Its founders are Jimmy Wales and Larry Sanger. They are no tech billionaires, yet they had done a lot democratizing access to knowledge. Wikipedia relies on donations. Wikimedia Foundation, the non-profit that owns Wikipedia, collected little over $100 million in donations last year.

Wikipedia is more of an exception than a rule in the online world. Judging from a swath of new tech IPOs, there is a theme that repeats a bit too often. Companies are growing rapidly yet not making money. It’s not just that. The faster they grow, the deeper the losses get. Traditionally, companies would go public, offer shares to investors, and raise money to grow. They would add store locations, manufacturing facilities, hire talent. Many of today’s tech IPOs raise money to cover growing losses. If the mindset is that they could grow their losses even faster if only they could go public, then it seems to me that the public shareholder is becoming more of a donor, making a donation, not an investment. The only difference is that there is hope that one can sell his or her participation in the venture (shares) to someone else for a higher price. As long as the stock price is going up and the public is willing to buy into these growing losses, no one cares about profitability, and everything appears to be fine.

If covering losses with newly raised capital wasn’t enough, recent IPOs have another peculiar quality. Their founders can cash out before the company even goes public. They can walk away with over a half-billion dollars before the company developed a business model, turned a profit, or got listed on the stock exchange. If creating a profitable lasting business is the goal of starting a company, then cashing out so early in the race feels greatly premature.

The challenge of the entrepreneur of the venture I mentioned at the beginning, and the many recent tech IPOs, is unit economics. It seems to be a forgotten concept these days, so let’s go back to cupcakes for a minute. If a pistachio cupcake with strawberry frosting costs $1 to make, including all – rent, labor, ingredients, marketing, etc., and it sells for $2.50, we have a $1.50 profit per unit. If we were selling it $0.50 and losing $0.50 on each cupcake, instinctively, we’d know something is not right.

In a phenomenal book “The Undercover Economist: Exposing Why the Rich are Rich, the Poor are Poor – and Why You Can Never Buy a Decent Used Car,” Tim Harford explains: “In a free market, people don’t buy things that are worth less to them than the asking price. And people don’t sell things that are worth more to them than the asking price (or if they do, it’s never for long; firms that routinely sell cups of coffee for half of what they cost to produce will go out of business pretty quickly).”

If it’s an exciting tech company, though, and it’s harder to tell what the cupcake really is, how much it costs to make, and how much we should charge for it, the story appears to get conveniently lost. We are told that losses are an investment in growth. How many cupcakes could you give away, and how fast, if you were “selling them” (translation: giving them away) at half the cost?

Let me be clear: a new business typically goes through a money-losing phase. It reaches a certain scale, figures out its cost structure, tests its pricing power, and eventually turns a profit. Otherwise, it’s a harsh reality check, and the cupcake store shuts down. Many new tech IPOs may prove to have a healthy business model, but others might be permanently not for profit. The latter won’t be worth billions as the market implies today. Maybe they will scale down and reach profitability as much smaller businesses. BlueApron, Groupon, RenRen, and many others among them, couldn’t defy gravity. Groupon was the craze of the day almost ten years ago, the fundamentals massively fell short of rosy expectations, and its stock price eventually reflected that with a 95% decrease since IPO (Source: Bloomberg).

We are always curious to learn about new companies getting listed. We keep reading about new travel sites, online dating apps, big data government contractors, online mortgage companies, food delivery apps, and more. It makes our job more interesting. We get to pick investments not just from the currently available few thousand publicly traded companies but also from all the new ones.

With the abundance of capital and the shortage of yield in the near zero-rate world, stock appreciation appears to have become the main source of returns. If it’s earned and deserved, it will likely last; if it’s only hyped up and inflated with no fundamentals to back it, it’s bound to vanish.

I think the lines between a business and a non-profit have gotten blurred. As long-term investors, we have to pay extra attention and don’t get tempted with any delicious frostings, especially when the cupcakes are given away at half the cost. It pays to know if we are making an investment or a donation, and they are not the same.

 

Happy Investing!

Bogumil Baranowski

Published: 2/17/2021

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

In the last few weeks, everyone’s attention has been captured by unusual price action in a particular stock – GameStop. It rose many times over, and a few more times on top of it. It’s gone up about 20x in a matter of weeks, and most of it in days. The media gave small retail investors credit for this eye-popping price move, and it came at the expense of a small group of prominent hedge fund investors who were on the other side of that trade. At first, it may seem that we are looking at a biblical moment of David’s victory over Goliath – but is it really so?

What happened with GameStop? We don’t usually comment on individual investments unless they are curious case studies that we feel compelled to share, and we think we can all learn from them. Let me try to cut through all the noise and fuss, and explain GameStop’s debacle.

GameStop is a video game retailer that was flirting with bankruptcy. They sell games through over 5,000 store locations. With consumers shifting away from physical towards downloaded video games, GameStop sales have been declining for years now. Bankruptcy is a legal process through which a company seeks relief of some or all of its debt to the creditors at a time when it can’t repay it. GameStop has struggled for a while, not being able to earn a profit, while the debt burden left them with few options. It wasn’t the first, and it won’t be the last company to find itself in this predicament. Usually, it’s a combination of a shrinking business with fixed costs, which leads to falling profits that turn into growing losses. The cash gets depleted, and often enough, a company on this path has substantial debt accumulated earlier, which eventually leads them into bankruptcy. In the last few years, and especially in 2020, we have seen many retailers go bankrupt, and GameStop was on a similar trajectory. In a bankruptcy, the shareholders, the equity investors lose it all and get completely wiped out in the process.

This creates a peculiar opportunity, though. As a shareholder, you own a small piece of business, and you potentially participate in its success. As a short-seller, you can benefit from the stock’s demise. Any investor aims to buy low and sell high. The shareholder does it in this particular order. The short-seller does the latter — first, and the former — second – he or she sells high and buys back low. A short-seller borrows shares, sells them with the hope of buying them at a much lower price later, and returning them to the lender.

I personally, and we as a firm have never done short-selling. We don’t like the risk/reward offered by this kind of trade. In simple terms, when you sell a stock short, your hypothetical upside maxes out at 100%, while your potential loss is unlimited. Imagine anyone shorting GameStop at $20 and covering his or her short position at $400; that’s a loss that amounts to 20x the initial invested capital. If it was a coin toss with a $1 bet that pays you a double or you lose $20, would you play? Usually, short-sellers do their work and research a company inside out, finding out every detail that could lower the odds of a 20x loss.

If the risk/reward wasn’t enough, from experience, we know that it’s intellectually and emotionally difficult to argue that there will be absolutely no good news ahead that could turn the fate around for an almost bankrupt company. We enjoy owning companies because they continue to surprise on the upside with new products, new markets, new ways of growing the business or doing business. The repertoire of good things that can happen is usually broader than a list of bad things that can truly tank the stock and bring it down to zero. We try to be rational optimists. There is no one size fit all, but for our clients and us, we don’t like the odds of short-selling; it’s one of many things we choose not to do.

What happened to GameStop is not unprecedented. It was a heavily shorted stock, which means many shares were borrowed and sold in anticipation of a price drop. Short-sellers don’t make a company go bankrupt; it’s lack of customers, the lack of demand for its products or service, or in other words — the shrinking, failing business that makes companies go bankrupt.

What followed wasn’t that unusual either. It’s referred to as short-squeeze. When something suddenly moves the stock up, the short-sellers quickly face an ever-growing loss. They sold the stock at $20, but now they have to buy it back at $40, $100, $200, $400, etc. To cut their losses, they tend to buy back the stock and return it to the lender. They close out the position. What happens, though, is that they create additional demand for the stock. The more shares were sold short earlier; the more has to be bought back to limit the losses. This will make the price go higher and move faster. It doesn’t mean it will stay high forever or even for long. It is no reflection on the failing business either. If the business was bad before, it remains bad no matter what happened to the price.

GameStop was doubling in price every few days recently, forcing short-sellers to act quickly. Who was on the two opposite sides of this intriguing price action? We had the buyers and the short-sellers. The buyers were apparently small retail investors who decided to jump in. The short-sellers were big hedge funds with billions on the line. There was probably more than one reason why buyers chased shares of an almost bankrupt company. Maybe some of them even genuinely hoped for a miraculous turnaround. Part of it was attributed to a coordinated effort from Reddit forum users. This was followed by Elon Musk’s tweet, and the stock was soon on fire. The more it rose, the more demand there was for the shares. Speculators were no longer interested in just the stock. They also bought derivatives, call options, which can potentially offer an even bigger upside if the stock price continues to go up.

Eventually, the trading in the stock was briefly halted on the stock exchange, and some retail brokers restricted trading in it. The whole debacle invited a big reaction from all directions, including the world of politics, with some congress members chiming in.

All noise and fuss aside — I still believe in the distinction between price and value. Without it the stock market becomes just a casino where pieces of paper trade with no regard for the businesses behind them. The value is what you get, and the price is what you pay. If a business is failing and short of a miracle it’s worth zero, the price will eventually be also zero. It doesn’t really matter if the price runs up 2x or 20x in between, and it doesn’t matter if it happens due to a sudden and potentially short-lived optimism around the businesses or frenzied share buying. It also doesn’t matter if the buyer is a handful of multi-billion dollar funds or tens of thousands or even millions of small investors. Again, short of a miracle, they are defying gravity here and making the price rise, while the value is what it was — likely still not far from zero.

Whether it’s a handful of big investors or millions of small ones, a coordinated effort to move a stock price (if that’s what indeed happened here) has a name, a reputation, and a long history. It’s commonly known as stock market manipulation, defined as a deliberate interference in the operation of the market. The way it happens has evolved. Participants don’t do it in person with paper receipts screaming on a floor of a stock exchange anymore; they do it with their smartphones from their couches. They don’t meet behind closed doors; they communicate in online forums. This doesn’t make it any easier to prove. WSJ recently wrote how the GameStop stock surges test the scope of the SEC’s (U.S. Securities and Exchange Commission) manipulation rules. WSJ further added that what happened resembles an all-too-familiar pump-and-dump scheme, when the stock is bought up at first to inflate the price and sold soon after to book a gain before it drops.

GameStop’s price rally suddenly became everyone’s business. The media painted a picture of David and Goliath, a small retail investor with hundreds of dollars, took on a big hedge fund honcho with deep pockets, and billions on the line. We weren’t there when David struck Goliath, but we were all here to watch this show live. I got messages and calls, and I have to confess that I almost missed the first leg of this performance until someone asked me what’s going on with GameStop? It’s not the first or the last market’s unusual behavior that might escape my attention.

With stocks, you can make money, and you can lose it. As long as you can afford what you are losing, I’d count it as tuition, the cost of an investor’s education (it’s cheaper to learn from other people’s mistakes, though). It’s a chance to learn from it and never do it again. If you are losing what you can’t afford or, worse, what you borrowed, and don’t even have, I think it’s a risk not worth taking. When the dust settles, GameStop will still be what it was earlier, an almost bankrupt company with failing fundamentals, too much debt, and growing losses. I know that miracles happen in life and business, and the management might have just earned a second chance to save the business. If some recent stock buyers truly wanted to save GameStop, their money would have been better spent actually shopping at GameStop, not bidding up its stock.

Will the stock hold the $200, $300, $400 price? We are yet to see – but there is the price, and there is the value, and the two don’t stay far apart for too long. Small investors might have taught the big hedge funds a lesson in the process, but I worry that the last bill is still due, and unfortunately, too many might be left with losses they can’t stomach.

I never owned it, I never shorted it, and I never will. I have no bone in the fight. I’m just a curious observer. It’s another case study for the books. The stock market can be a casino or a wealth-building machine. You can be a day trader or a lifelong investor. I don’t know of any lifelong day traders. They all eventually run out of money to lose. The beauty of investing is that you can have a lifetime of successful investing without ever participating in the noise of the day, and that’s what I’d recommend — if you asked.

 

Happy Investing!

Bogumil Baranowski

Published:  2/1/2021

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

 

I often ask my partner and mentor, François Sicart, to share more about investing in the 1970s and the 1980s. We both like to find themes, parallels, lessons in the past that may help us understand today and the future. I can picture a younger client, or portfolio manager asking me in 2050 to tell him or her more about 2020. I will be a young 70-year-old at that point. I will refresh my memory and look for a theme or maybe even just one word. That word will likely be – the disconnect. There are at least three major disconnects occurring this year. First, the stock market has decoupled from the real economy. Second, a handful of mega-cap tech stocks took off and left the rest of the market behind. Third, those who were able to work from home have experienced a very different year than those whose jobs were lost because their work depends on the face to face interactions.

If we were to look at the economy and the stock market, we’d see two very different stories. The economy is still struggling to recover, while the stock market is reaching new highs. We often remind our readers that the stock market is not the economy, and the economy is not the stock market. The economy represents all the economic activity in a specific year in a particular part of the world. It’s all the goods and services that have been made available and found buyers. The stock market is a place where the ownership of many businesses can be exchanged in the form of shares. When we talk about the stock market, we often have an index in mind, the S&P 500, for example, representing the 500 largest U.S. corporations. We also have a tech index — Nasdaq, and broader indices like Russell or Wilshire 5000. The last one is often called the total stock market index since it attempts to capture all publicly traded companies in the US. We also have countless indices abroad around the world. The list goes on.

If the economy represents the activity and the stock market the ownership, they can sometimes tell the same story, but other times, they might be disconnected. Suppose the economy is doing well and continues to improve. In that case, it’s not unusual to see the stock market move up higher to account for more activity and likely higher corporate profits. The stock market tends to react quickly, and it usually leads rather than follows the economy. It’s far from a perfect leading indicator, though. If there is any doubt about the future growth in profits and economic growth, the market may promptly turn lower. The opposite happens when the market rises when investors find any reason for more optimism ahead.

This year between February 20th and March 23rd, the S&P 500 dropped 33%.  The market lost three years of gains in a matter of three weeks. We like to compare it to an escalator ride up and an elevator ride down. We had a number of days with 5%+ drops, and the Dow Jones Industrial Average lost almost 13% on March 16^th alone. The market decline started weeks before we saw any lockdowns in the U.S. Ten days after the U.S. declared the national emergency on March 23^rd, the market bottomed though and began a quick rise. By August, the S&P 500 recouped March losses and reached pre-Covid February levels, and now in November, it’s hovering almost 10% above that earlier peak (Source: Bloomberg).

The March market correction was an exceptionally accurate estimate of what we were to see in terms of earnings drop and the business decline in the coming months.

When the S&P 500 bottomed in March, it was down 33% from its February high. In July, we learned the GDP; the economy contracted at an annual rate of 32.9% in the second quarter. The third quarter showed a 30%+ recovery from the previous quarter. The Brookings Institution reminds us that despite last quarter’s recovery, the economy is “still more than 4 percent below its level at the end of 2019, which is more than the farthest the economy ever was from its prior peak in the Great Recession.” We also witnessed a 33% decline in corporate profits in the second quarter, which was the largest quarterly decline since the first quarter of 2009. In the third quarter, S&P 500 profits were down 7% year over year. As much as we have seen improvement since the second quarter, the economy and the corporate profits still have a long way to go before full recovery.

We could say that the market went from discounting the potential economic downturn to ignoring it entirely and looking far past it. Ideally, we could see the economy and earnings converge with a rising market at some point. That quick path to recovery is far from certain, though. For now, we know that the number of companies issuing quarterly guidance dropped by 1/3, and more the 100 S&P 500 companies have either withdrawn or not provided annual guidance for 2020 and 2021. The forward visibility remains limited.

The second disconnect we see is between the performance of the mega-cap tech stocks and the rest of the market. We may think that the stock market experienced such an incredible recovery this year, but we’ll notice that there are two different stories to tell if we look closer. The entire S&P 500 year-to-day performance can be explained by the rise of the tech giants, the FAANGs; the rest of the market returned (after one of the wildest rides in the market history) 0% for the year as of mid-November.

According to Yardeni Research, the FANGs represent 12.7% of the market capitalization of the S&P 500, but only 4.9% of earnings and a mere 0.5% of revenue. An image of a tail wagging the dog comes to mind. If we broaden the FANG index from the four stocks: Facebook, Amazon, Netflix, and Google, and add Apple and Microsoft, the tech giants account for 25% of the S&P 500, up from 8% only in 2013.

Tech giants reported record earnings last quarter. Apple was the only major tech company with profits dipping. The nature of their business and their growth profile helped them grow and even benefit from the pandemic downturn. More shoppers spent money online, and that’s where advertising dollars headed, too. If we look back at the fourth quarter of last year (which was reported weeks before the March crash), we’d see a very similar picture, though. Outside of the five tech companies, the S&P 500 recorded no earnings growth in that quarter. Even without the pandemic, the whole earnings growth for all 500 largest US companies already relied almost exclusively on a few tech giants pulling all the weight.

There is no question that tech companies caught a significant tailwind this year, on top of favorable long-term trends helping their businesses. NYSE FANG+ index tracking the tech giants rose over 100% since March, while the entire S&P 500 went up by 57% (Source: Bloomberg). The question remains if their eye-popping rally this year is fully deserved. Will, the rest of the stock market, catch up, or the tech valuations will come down and converge with the rest of the market?

The third disconnect has appeared between the work from home employees vs. face to face the economy. In March, everyone that could do it transitioned overnight to a 100% work from home model. They picked up their laptops and went home. They turned their attics, spare rooms, bedroom, kitchen table, porches into their home offices. I know that Megan and I did, so did our entire team. We realized, though, that we were the more fortunate group. Our work can be done from almost anywhere. I know it’s not all of it, and many aspects could be done better in person, but if we have to, we can make a lot happen remotely. This year, it has been a blessing and allowed us to conduct our business as usual smoothly and without missing a beat.

At the same time, during spring lockdowns, we saw many local bars, restaurants, gyms, barbers, coffee shops, and stores shutdown. Some of them were able to adapt and do business online one way or the other. Some switched to curbside pick up, delivery, or drive through. All those attempts to do business despite restrictions gave only that much benefit and hasn’t entirely replaced the lost business. Summer months brought some relief, with more businesses reopening around the country and the world.  Here we are in November 2020, though, and we see more restrictions and lockdowns triggered by Covid cases spiking again. We might not be out of the woods yet. We also notice how major cities in the U.S., New York City, among them, have struggled to recover. It hasn’t been enough to just open doors again and let customers in. The new challenge has been the absence of traffic. The tourists aren’t back due to travel restrictions, and the daily commuter crowd is not there. The current office use in New York City has been under 10%.

The Covid pandemic made us realize how much of the economy and the employment relies on the daily commuter culture. I used to drop off my dry cleaning on the way to work, get coffee now and then, see clients for lunch, friends for dinner, catch a show or a movie in the theater. Our Manhattan life and daily routine kept a lot of businesses around. September’s article in the Medium pointed out a whole multi-trillion-dollar ecosystem built around a white-collar office worker in the U.S. alone. This might prove to be one of the biggest policy challenges for major cities and commuter areas. For now, though, we see the disconnect between those who were able to keep their jobs, do business remotely from home and those whose face to face interaction driven, location depended businesses have struggled. We are yet to see how we can reconcile the two over time.

The three disconnects are related. Would they have happened without Covid? My best guess is that work from home would have happened, but much more slowly. The U.S. stock market would have struggled to keep rising without such a massive pandemic booster shot in the arm from the Federal Reserve. Without lockdowns, the tech stocks would have still shined compared to the rest of the economy, but the difference wouldn’t have been a lot less striking.

Disconnects tend to close over time. Will the economy catch up with lofty market levels? Will the rest of the corporate world catch up with the high flying tech stocks? Will the face to face economy find a way to catch up with the work from home model? Maybe all three will meet halfway. I trust that when I get asked about 2020 in 2050, I’ll have all the answers. For now, we have to operate with what we know. The disconnects are there, and if the gaps were to close, we could see some interesting challenges and opportunities ahead.

 

Happy Investing!

Bogumil Baranowski

Published: 11/19/2020

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

A unicorn might be the famous mythical creature with a spiraling horn projecting from its forehead, but in the investing vocabulary, a unicorn is a privately held startup priced at over $1 billion. The unicorn as a term with its Latin and Ancient Greek roots signifies something desirable but hard to find. CB Insights lists 495 unicorn companies in the world. There are 500 companies in the S&P 500, the US stock index that includes the 500 largest companies. If there are almost 500 unicorn companies, are they still that rare and hard to find? This revelation made me think of the other unicorns. Not the highly-priced new exciting companies that have yet to prove their business models, but the older, more established companies that trade at low valuations (less than ten times their annual earnings, for example). There aren’t many of them to be found.

The terms value and price are often confused in the investing world. We agree with the legendary investor Warren Buffett’s definition: “Price is what you pay; value is what you get.” In that case, tech unicorns are priced at $1 billion or more, but we are yet to see what we are really buying and what the value might prove to be. Some of those companies will prosper; some of them will fail. That’s the nature of all early-stage companies. They are still in the process of developing their product or service, finding their customers, and finally establishing their business model – a path to profitability. Any company with no plan or intention to reach a profit has no business, in our opinion. It resembles more a non-profit with private shareholders providing financial support for the time being. When those shareholders realize that there are no profits, we expect/believe/have seen they wake up and run. If they are still holding on to their shares with hopes of gains, they possibly subscribe to the Greater Fool Theory. That’s the idea of selling shares at a higher price to someone else — the greater fool.

Most recently, WeWork has been a prime example of such a company, a tech unicorn who rose quickly, focusing on growth at any cost. We had our experience meeting with many WeWork reps as we were looking for our New York office space over four years ago. It seemed to be a very aggressive sales machine taking over buildings and floors from major companies as they were shrinking their Manhattan footprint. One of those locations was a prime Park Avenue location that I remember visiting a few years earlier. It held the offices of one of our portfolio holdings that’s been in the process of reviewing their office space needs. That was long before the 2020 work from the home shift caused by the Covid pandemic.

After years of eye-popping growth, WeWork attempted to go public and offer its shares to new investors. It was supposed to be priced at $47 billion. That would buy you one and a half of Walgreens, one of two major chains of pharmacies in the U.S., together with its international presence. WeWork reported a $1.3 billion operating loss in the first six months of 2019 alone (Source: company filings, S-1) while recording $1.5 billion in revenue. That’s not that much different than giving away $100 bills for $50. How quickly can you find takers for $100 bills if you charge $50 for them? There is no real limit to such growth, but it’s not growth that leads to profitability. As a comparison, Walgreens earns around $4 billion of profits on over $130 billion in revenue annually.

WeWork knew it well and didn’t hide it. They actually openly disclosed in their IPO filings: “We have a history of losses and, especially if we continue to grow at an accelerated rate, we may be unable to achieve profitability at a company level (as determined in accordance with GAAP) for the foreseeable future.”

A long-term investor (as opposed to a trader or speculator looking for a greater fool) would only buy a business for its current or expected profits (earnings). How would we value a company that doesn’t expect any profits in “the foreseeable future.”  That might be beyond the limits of any reasonable investment horizon.

It was quite refreshing to see the market reject the IPO, and WeWork is still trying to find its bearings a year later. The Covid pandemic and work from the home model have only made it more challenging to turn it around. WeWork might have been priced at $47 billion at some point, but we are yet to see what its actual value proves to be.

Looking for the other unicorns, I came across an article. This summer, Barron’s made a list of ten S&P 500 stocks with a market capitalization above $5 billion, and the lowest price to earnings, in other words, ten cheapest stocks. A shortlist of ten included some insurance, health care, old tech companies, among others—familiar brands and businesses, with mostly steady earnings but no excitement or growth. What caught my attention was the length of the list – 10! Not 495. What rare finds these stocks have become, especially compared to startup unicorns.

I remember recommending stocks as a junior analyst some 15 years ago now. We would sit around a big long conference room table and present investment ideas to fellow portfolio managers. Some of my more senior colleagues with vivid memories of the 1980s markets occasionally asked me if the stock was trading below ten times earnings (meaning, we pay less than ten dollars for each dollar of our annual earnings of the company). I would often say no, and explain why it deserves a higher multiple. It had a unique market position, growth potential, brand, etc. I was always curious about those mythical times when the markets were apparently full of companies trading at sub-10x earnings. In my early days, I still could find cheap stocks that met this stringent criterion. Some of them even qualified as decent investment ideas. More recently, though, I see that this group has dwindled to the point that I could almost count them on the fingers of my two hands. What happened?

As a student of history, I asked, investigated, and read to understand better where those other unicorns have gone. Those mythical creatures that used to roam the markets freely and could be bought at low multiples, and even offer generous dividends are nowhere to be seen. Today, the unicorn label has been claimed by the exciting startups, who have become anything but rare.

I believe the most significant phenomenon that occurred since 1980, which coincides with the year when I was born, has been a gradual decline in interest rates and a continuous increase in debt worldwide and in the US. The 10-year US treasury yield peaked at close to 16% in 1981 and has fallen to 0.8% as of November 2020.  Simultaneously, the price to earnings ratio for the S&P 500 rose from 7-8x in 1980 to 25x+ this year. No wonder most of the sub-10x earnings companies that many portfolio managers reminisced about vanished. When the entire S&P 500 was trading at 7x-8x, I’d imagine there were many sub-10x earnings stocks in this index of 500 companies. The term startup unicorn was not even around yet back then. We’d have to wait until 2013 when Aileen Lee, a venture capital investor, chose the word unicorn to represent a statistical rarity of a billion-dollar venture. It took only seven years to have all 495 of them!

As the debt got cheaper, we got more of it. The US public debt went from 32% of the GDP to over 100%. Household and corporate debt grew with it. Accommodating monetary policy with ever lower interest rates made it harder to earn interest on savings. I remember how only 15 years ago, I had a one year certificate of deposit with a major bank paying 5% annually. Today, it’s not only impossible to find such a rate but 10-year Treasury yields below 1% (Source: Bloomberg); finding any respectable yield has become more challenging.

On top of that, we witness a sea of negative interest rate bonds that reached $16 trillion recently. You have to pay the borrower to take your money. I remember defending my master thesis at the Warsaw School of Economics 17 years ago. One of the questions that came up was about credit risk. We discussed the need to compensate the lender for taking on the risk of lending the money to the borrower. Watching the growing number of bonds with negative yields, I wonder if the laws of economics have somehow been rewritten since I picked up my diploma? Today, we flipped the 5,000-year-old logic on its head. That didn’t happen without some unforeseen consequences and bizarre phenomena – tech unicorns among them.

In the name of maintaining economic growth, we embarked on a monetary and fiscal experiment that has numerous curious side effects. With the lack of yield in the bond markets and a shrinking number of dividend-paying stocks, price appreciation has become the primary goal for many investors. They felt forced to move toward riskier assets in search of returns. This phenomenon made substantial capital available to promising new ventures that can quickly reach very high prices, multi-billion dollar market capitalization still in the private market — the famous startup unicorns. Among them, you can find these days decacorns and hectocorns with over $10 billion, and $100 billion private market valuations, respectively. Deca and hecto are terms derived from Ancient Greek, similarly to a unicorn itself, which has been a wonder for humanity since Antiquity. It took the 21^st-century financial creativity of zero interest rates combined with desperation for returns to breed not only unicorns but a whole new species — decacorns and hectocorns. We could only imagine what the Ancient Greeks would think of these inventions.

As students of history, and observers of nature, we see how both follow cycles, empires rise, empires fall, the ocean tides follow a similar pattern, so do the seasons of the year, and credit, business, and economic cycles are no different. We might be at a peculiar point in our financial history as it’s being written today. Tech unicorns are proving to be as common as US large-cap companies. Low multiple, good business, high dividend stocks seem to have become as rare as a fair-weather rufous hummingbird sighting in Alaska in January. We might have to wait a little longer than expected, but something tells us that tides will turn, as they have before. We believe investors will have abundant investment options again with yields and valuations closer to historical levels when the other unicorns make a comeback (my other unicorns might actually resemble more majestic rhinos, given their steady business and intimidating size). For now, I’d recommend two words (also borrowed from Latin and Greek): a healthy dose of caution and skepticism.

Happy Investing!

Bogumil Baranowski

Published: 11/12/2020

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

This article was inspired by comments and thoughts I have been hearing from fellow investors concerned about the fear of missing out on this ever-rising market that has defied laws of gravity.

I imagine that almost everyone has heard the story of young Isaac Newton watching an apple fall from a tree, which inspired his theory of gravity. A story he shared himself in his memoirs. I will guess that a few would know that he was home at the time, away from school due to a plague going around. And I can bet that even fewer know that the same Newton made some money, but lost a fortune in a stock bubble of his time!

I remember how my physics teacher was able to bring his stories and discoveries to life (she didn’t mention he made and lost a fortune in the South Sea Company Bubble!). When I think of physics, laws of nature, I still see him. When I see a stock melt-up quintupling in a few months, for no reason, I also think of him! For a long time, physics was one of my favorite subjects at school, and I still have a weakness for it. I liked its logic and how it explains the universe. I think that in some way, I often hoped that economics, finance, and investing would have clear laws like physics, and explain the world around us. They don’t.

You might see some parallels between Newton’s life and our 2020 pandemic, stay-at-home, work-from-home policies, and a bubbly stock market.

The time spent at home between 1655 and 1657 Isaac Newton called in his memoirs the Year of Wonders, the time he embarked on a journey of understanding how the universe works. Woolsthorpe Manor, his birthplace and the family home, was the place where Newton found refuge during the plague, and it was the place where he retreated through his life to think and write.

The bubonic “Great Plague” (the worst plague to hit the UK since the black death of 1348) sent many home, away from schools, and cities. Town-dwellers retreated to the countryside, while London alone lost 15% of its population to the plague. Newton made the best of this time, writing later: “For in those days I was in the prime of my age for invention and minded mathematics and philosophy more than at any time since.” It was then when he developed his theories on calculus, optics, and the laws of motion and gravity.

It’s been a little over six months since this year’s pandemic sent our Team home. We left our Manhattan office behind and retreated to our homes, and in my case, two different cabins in the Appalachian Mountains. I can’t say that I had a chance to reinvent the laws of physics in my time away. I have been reading, writing, and thinking more than in a while, though. I can’t help but count this peculiar period among the most productive in my life. I also took up several online courses that I have always wanted to do. Megan and I even embarked on learning Spanish together. To a great surprise of other hikers, we have been practicing rolling our “Rs” lately on our regular waterfall walk. I also completed training for various software solutions we use for work. I saw significant leaps in virtualization, digitization, streamlining of many processes that make up the work we do. It saves time, limits errors, and leaves more time to talk to our clients and look for investment ideas. We owe a big thank you to all our service providers that make our business possible.

Newton might have spent his time at-home wisely explaining the laws of physics, but it was only later that he learned more about human behavior, finance, and stock investing! He is believed to have concluded: “I can calculate the motion of heavenly bodies but not the madness of people.” If not for human emotion, one could imagine the stock market and finance follow precise laws the same as those that govern the stars and planets in the sky. For better or worse, it’s not the case. It offers buying opportunities for calm, disciplined investors, and it may cost a fortune those who give in to greed and fear—the fear of missing out being at the very top of the dangers to any investor.

Sir Isaac Newton was not immune. Apart from physics, mathematics, astronomy Newton was no stranger to money, finance, and investing. He held a position of the Master of the Royal Mint and even worked as a detective chasing money counterfeiters. He was also a shrewd investor in years before the South Sea Company Bubble. It is believed that Newton made money in the initial rise of the South Sea Company stock, sold his holdings, only to buy in again as the stock continued to rise with no end in sight. The South Sea Company bubble eventually burst, fortunes were lost, and Newton himself lost some £20,000 (or about $20 million today), according to his biographer.

That’s a story I didn’t learn in my physics class. I read it first in the commentary to the introduction of  Benjamin Graham’s (father of value investing) classic – The Intelligent Investor:

“Back in the spring of 1720, Sir Isaac Newton owned shares in the South Sea Company, the hottest stock in England. Sensing that the market was getting out of hand, the great physicist muttered that he ‘could calculate the motions of the heavenly bodies, but not the madness of the people.’ Newton dumped his South Sea shares, pocketing a 100% profit totaling £7,000. But just months later, swept up in the wild enthusiasm of the market, Newton jumped back in at a much higher price — and lost £20,000. For the rest of his life, he forbade anyone to speak the words’ South Sea’ in his presence.”

My Parisian grad school professor in the aftermath of the Internet Bubble burst (2000), and likely due to his own experience losing a fair amount of money, assigned to us a study of all the major past bubbles. I couldn’t be more grateful for that lesson. It definitely shaped my investment approach for the rest of my career. My professor’s quick advice was – don’t buy stocks because there are bubbles. What I heard, and what I chose to walk away with was – since there are bubbles, there might a good time to buy stocks and a good time to sell them.

Newton’s investment: the South Sea Company Bubble was at the top of our study list, as it is among the most famous bubbles in history. South Sea Company was founded in 1711 as a joint-stock company. This particular company was created to consolidate the national debt of Great Britain and reduce the cost of it. Needless to say, excess public debt seems to be a theme that repeats through history, including today, with looming record deficits all around. The company was given a monopoly on trade with South America to generate income. Since Great Britain was involved in the War of the Spanish Succession at the time, and Spain and Portugal controlled most of South America, the prospects for profits were meager. The company never realized any significant profit from its monopoly.

South Sea Company leadership wasn’t worried too much by likely business challenges. They got inspired by the financial wizardry of a Scottish financier, John Law. France, as much as Great Britain, wanted to get rid of its debt. Louis XIV’s reign almost bankrupted the French monarchy, leaving the country with a big problem. Instead of tightening the belt and paying off what’s owed, France endorsed John Law’s monetary shenanigans. He consolidated the debt and offered shares in a promising business venture in exchange. His Mississippi Company was given a monopoly on trade and mineral wealth in French colonies in North America and the West Indies. Law exaggerated the business opportunity creating excitement around the stock, which kept rising higher and higher. He also controlled the money issuing bank in France, Banque Royale. Eventually, the company and the bank merged. Money was printed to allow investors to buy more shares in the company, further inflating its price. Ultimately, the sentiment shifted; investors wanted their money back; the price collapsed. Law tried all kinds of restrictions to keep the madness going. Payment in gold and silver for paper money was suspended. Holding precious metals was made illegal.

The bubble burst, John Law, escaped, and one would hope an invaluable lesson for investors, financiers, and central bankers was carved in stone never to repeat. I highly recommend Virginia Cowles’s book – The Great Swindle: A History of the South Sea Bubble, if you want to learn more about both companies, both bubbles and their aftermath.

***

Yet here we are, in the second half of 2020, public debts are at record highs. US numbers are staggering. This year’s fiscal deficit is expected to reach almost 20% of the GDP (the 50-year average is closer to 3%, and the last recession recorded about a 10% deficit). Total Federal government debt is about to reach 100% of the GDP, which is as high as during the last debt peak after WW2.

Our money is not convertible to gold or silver; we can still, though, buy and hold precious metals. The Federal Reserve (the US central bank) has been busy printing more money, lowering the cost of debt to almost zero. This new money might be digital, and it might be sitting on the balance sheets of banks, but no matter how you look at it, these are fresh new dollars created at no cost, and there are a lot of them. Pre-pandemic, the Fed already held $4 trillion in assets on the balance sheet, and now leaped to $7 trillion in a matter of months. What does it mean, though? The Fed issued new money to buy the debt of various kinds: public debt, mortgages, and, more recently, corporate debt. Now, if the Fed is buying, someone is selling and ends up with cash. That freed up cash can buy whatever is left to buy – how about stocks? I can’t help but see another parallel with John Law’s attempt to print money to help investors buy more shares in the Mississippi Company.

Where does the Federal Reserve end, where does the market begin, we can start to wonder? That’s been a moving target, but it starts to bear the resemblances of John Law’s merger of Banque Royale and his Mississippi company. Actually, the minute the Federal Reserve starts buying US equities, there won’t be much of a line left between the Fed and the market. The Fed will effectively become the market. We certainly hope we never go that far, but other central banks, including the Swiss National Bank and the Bank of Japan, have crossed that line already. Our portfolio gold holdings give us some peace of mind if that were to happen.

Lots of debt, unlimited paper money, and a bubble in a stock or many stocks… that summed it all up in 1720 Great Britain and France, and it sums it up in our 2020. If you overlay it with an economic recession – GDP dropping by 1/3, corporate profits down by 1/3 in the second quarter, with record unemployment, the disconnect between the market and the reality is even more glaring.

You would think that investors today have a wider choice than two trading companies with promised trade monopolies oceans away. Nasdaq 100, the technology index of the largest 100 tech companies, rose over 70% since March lows through the summer peak (Source: Bloomberg). At the same time, the NYSE FANG+ index doubled during the same period. The latter covers only a handful (ten) of the largest, best performing technology stocks. Investors have conveniently ignored the other few thousand publicly traded stocks and chose to chase a tiny group of ever-rising, seemingly invincible stocks. The index mentioned above generously includes ten companies, but investors’ attention has been mostly focused on 4-5 stocks, namely Facebook, Amazon, Apple, Netflix, and Google, with frequent mention of Tesla, Inc.

In a single year, the South Sea Company price went up from £100 to £1000; in our today’s tech world, we witnessed Tesla, Inc. rise seven times since March alone before early September correction. One rose on expectations of the great riches brought by a trade monopoly from distant lands, the latter on the great success of electric cars in the distant future.

Both Americas prospered over the following centuries, but it wasn’t either of the two trade companies that benefited much from it, and it was definitely not their shareholders that saw much gain from it either. During the Internet bubble (which still haunted my grad school professor), we witnessed a new technological revolution, but again very few companies lasted long enough to capture its benefits. Today is not different; we do not doubt that some of the top tech companies inflating the market might have some remarkable businesses. We also pay attention to several new multi-billion-dollar companies (many of them “profit free” but full of promise) to be listed in the coming months. The excitement will come and go. Profitable companies are likely here to stay, and if we pay reasonable prices for them, we may even benefit from their success. Chasing rising stocks, and giving in to the fear of missing out, didn’t work for our Isaac Newton three hundred years ago, and won’t likely work today.

Whenever we don’t know what the future may hold, we like to pick up yet another history book, and this might prove to be the best use of our work from home time, and Virginia Cowles – The Great Swindle: A History of the South Sea Bubble is not a bad place to start.

Happy Investing!

Bogumil Baranowski

Published:

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

 

Recently we had the pleasure of hosting an investment idea Zoom call. Normally, we’d have an intimate “idea lunch” in our Manhattan high-rise overlooking Central Park and the Hudson River. This time, our team and a number of guests (friends of the firm) all tuned in from around the country and as far abroad as Mexico and Bermuda! Only their backgrounds of trees outside the window, beautiful bookshelves, and nautically themed paintings could reveal where they might be. Among the stocks we discussed, we came up with some interesting ideas that we call boring stocks for exciting times.

Hosting an idea lunch before required everyone to be in Manhattan at the same time. With everyone’s busy schedules it’s never been an easy task. This time a virtual Zoom idea call was a breeze to organize. We picked a few dates, and times, and everyone just called in from wherever they are. We may be remote, even far from each other, but thanks to technology we are able to stay connected, and tuned in, possibly more than ever!

There is no question that this year has been full of surprises. From market highs, we proceeded to multi-year lows, followed by a sudden recovery back to new highs. The economy, profits, and employment are still in the midst of a slow recovery. The political backdrop, with presidential elections in November, remains highly uncertain. If that wasn’t enough, the pandemic that has caused enormous disruption in our lives, the economy, and politics seems to be far from over. If these aren’t “exciting times,” we don’t know what are.

Why should boring stocks be appealing in “exciting” times though? We could argue that the stock market has become largely disconnected from the fundamentals. We would even argue that March lows were a more accurate reflection of the economic backdrop than today’s highs.  On one hand profits dropped while on the other, stock prices rose.

But lately the stock market has been a tale of two worlds. One represents a small group of tech companies — asset-light or even asset-free – whose business, clients, and operations are seemingly both everywhere and nowhere. The services they offer have suffered limited headwinds during the COVID lockdowns. The other group — the majority of publicly-traded companies — has suffered from the impact of lockdowns and a drop in economic activity. At best they have been able to hold their ground, even if they couldn’t show growth and expansion. Some are in a position to weather the storm, even taking market share to prosper, while others may yet fail, disappointing investors.

The market, in the near term at least, has favored the high-growth exciting companies vs. the steady but slower businesses. The top five tech stocks (FAAMG: Facebook, Amazon, Apple, Microsoft, Google) have been up some 35% this year, while the remaining 495 stocks of the S&P 500 are down 5% (as of late July). On relative basis, the five tech companies may look like heroes with a 2% earnings growth vs. 38% earnings drop for the remaining 495 S&P 500 stocks.

Does a 2% growth deserve a 35% price rally? And does a 5% price drop accurately reflect a 38% profit decline? In our opinion, both answers are “no.” Simply said, both groups seem overpriced in aggregate.

However, a careful look reveals a good number of stocks with steady businesses that still may have to face some pandemic-related headaches, but are positioned to thrive beyond the current situation. Among those, we still find investment opportunities. On the whole these are quality businesses whose stocks may have rallied lately. Given their high profits and attractive valuations, we see only a minor disconnect between price and value with these stocks. We could even argue that there is a compelling discount between what we pay and what we get. We see them as offering better potential for capital growth and preservation than most of the investment opportunities capturing investors’ attention these days.

Markets have a tendency to change their minds quickly. Today’s FAAMG rally is no different from earlier market enthusiasms. The Nifty Fifty of the 1960s and 1970s present an excellent example. These were fifty U.S. large cap stocks considered one-decision investments that should be bought at any price. They subsequently crashed, and their valuations were brought down. Many – including formerly familiar brands like Polaroid, Sears, and Digital Equipment Company — have vanished or become shadows of their former robust businesses. I highly recommend my partner’s François Sicart’s recent article for more history lessons from past market darlings – RCA, NIFTY FIFTY, AOL and FANGs.

Among the “boring” stocks we currently favor, you’ll see major pharmacy chains, telecoms, food companies, and substantial players in agribusiness, among others. We do supplement this group with more “exciting” businesses, but only if the price makes sense to us.

The next six months may bring surprises, but we remain very comfortable with our portfolio positioning: ample cash ready to deploy, a good-sized gold position to weather the uncertainty, and a thoughtful selection of companies that includes many boring stocks for exciting times.

Happy Investing!

Bogumil Baranowski

Published:  8/27/2020

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

 

In these Covid-era days, we often have to make unfamiliar choices, many of which involve deciding among levels of risk. Megan and I like to break up our work routine and step away from our laptops now and then. Situated as we are in the woods, hiking has become a pleasant escape. Some trails pass right by our cabin, and we can reach others a short drive away. What we’ve learned is that we have a choice between busier trails and less-frequented ones. The former carry a risk of running into someone sick, so we carry masks. But the latter sometimes present the unpleasant surprise of big fat rattlesnakes basking in the sun. Either way, we have to accept a certain risk, and realize that even an innocent hike is not really risk-free!

At some point in my finance education, I was introduced to the notions of a risk-free rate and a risk-free investment. I don’t know if it was my skeptical nature or my nascent contrarian bone, but they just didn’t sound right to me. Intuitively, I believed investment always involves a risk, and only sometimes offers a reward. I also thought, and still think, that not all rewards are worth the risk they entail. Finally, I realized that not all risks are immediately visible — like that big rattlesnake camouflaged by its surroundings.

Speaking of rattlesnakes, once I encounter a new risk, I like to understand the odds of harm and the way to address it. Although there are only 7,000 snake bites a year in the U.S., the averages don’t tell the entire truth. A competent statistician would insist that we are more likely to win a lottery than to suffer a snake bite, or even encounter a snake! However, if you’re hiking in our current neighborhood, the odds tilt dramatically toward a human/snake confrontation every single day. Let me tell you, that doesn’t feel like a lottery win at all!

I have also learned that the best snake bite emergency tool kit is … a phone and a car key. Unfortunately, an encounter may happen miles from a parking lot, with no phone signal, and a long drive to a hospital. Experts advise the bite victim keep his or her heart rate down to slow the spread of the venom. (My heart rate goes up at a mere sight of the reptile!) The victim has hours to reach a hospital where the antivenom can be administered. The 24 hours following the bite are apparently very unpleasant, and recovery may take weeks or months.

All of this is by way of pointing out that there is no such thing as risk-free hiking. All the same, some of my professors as well as many investors still claim there is such a thing as a risk-free rate, as well as risk-free investment. Such an investment has scheduled payment(s) over a fixed period of time that are assumed to meet all payment obligations; a government bond is one example.  Many financial models (such as the discounted cash flow model and the Black Scholes model among others) use the so-called risk free rate to price other assets such as stocks, options, bonds etc.

Anyone who grew up in a country that has defaulted on its debt (including yours truly in Poland) would never consider a government bond risk-free. U.S. investors haven’t had that experience. Over 200 years ago, in the aftermath of the Revolutionary War that brought the U.S. independence from the Kingdom of Great Britain, the country faced a dilemma: should it honor its war debts or not? Alexander Hamilton wanted to do the former, while James Madison had other ideas. The debt was trading at a big discount to face value, and Madison wanted to pay only the current price. Hamilton won the argument in favor of repaying the debt at full face value. This historic move restored the world’s confidence in the infant nation’s ability to pay its debts!

Since then, we’ve come to believe that the U.S. can’t default on its debt. Almost 10 years ago, the former Federal Reserve chairman Alan Greenspan told us there was no chance of a U.S. default. Why? Because we can’t print more money, he told us. That may be true, but as Poland’s example demonstrates, printing money to pay government debt can lead to a devasting hyperinflation. Many countries, many civilizations (including the Ancient Greeks, the Ancient Romans, and the Chinese emperors) tried to debase their currency to get out of debt. The practice is as old as money itself. Technically default may be avoided, but the value of the money we get back could be a fraction of what we initially lent to the government. That doesn’t sound like a risk-free investment at all, does it?

Today, U.S interest rates hover just above zero, and the allegedly risk-free rate on a 10-year US Treasury bond is paying a mere 0.55%. In other words, if you lend the government a million dollars for 10 years, you’ll get paid $5,500 for each year. The return would have been 6 times as much only 18 months ago. Even if we disagree on whether it’s truly a risk-free investment, we can all agree that it’s almost reward-free.

Let’s remember, though, how all assets are priced based on the risk-free rate. The lower it goes, the higher-priced other assets become, including other bonds (including corporate bonds) or stocks. Looking at the post-March 2020 stock market rally, we can see the correlation between asset prices and the risk-free rate. Interest rates dropped; asset prices jumped higher. Investors, seeing stock prices rise yet again (despite falling corporate profits, record unemployment, and rising health risks) start to believe that stocks look like a risk-free investment, too. “If you can’t lose money in a pandemic year, when can you lose money?” a friend asked me recently.

It sounds like a familiar idea. We’ve been told before that home prices could only go up. Now, it seems that stocks can only go up, even if the companies don’t make profits, if their storefronts or factories close, and if their customers have lost their jobs.

In a conversation with my mentor and partner, François Sicart, I brought up the interesting challenge of investing in a world where you supposedly can’t lose money, and everything can be presented as a risk-free investment. As always, he shared his words of wisdom, and told me: “I’ve always said that I don’t invest in things where I ‘can’t lose money.’ Such a market would be a good example.” Our discussion also inspired his last article aptly titled: If I ever retire, I know what the reason might be.

Having ran into some highly venomous snakes in the last few days, I have a new understanding of the risks that hikers take, especially those brave enough to head out on the less frequented, beautiful, but overgrown trails. Just because you aren’t aware of a risk doesn’t mean it’s not there. If you are heading out hiking, take a stick with you, and watch where you step. If you think you’re making a risk-free investment in a bond, stock or real estate for that matter, look again!

Happy Investing!

Bogumil Baranowski

Published:

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

To most of us, the March stock market sell-off might have felt like a train wreck, but today in early June the fast stock market rally may feel like a train you can’t miss. Which one is it then?

These were the thoughts I walked away with from a talk I gave at Intel to some five hundred attendees recently. No, I didn’t hop on a plane to see them in person, as I would have only a few months ago. Instead I joined them over Webex from the comfort of my makeshift home office. The event was hosted by a good friend, Yedu Jathavedan, who is a fellow investor and a true stock market enthusiast. I shared the virtual stage with Jake Taylor, another good friend and fellow investor as well as an author and a podcast host.

The last time I saw Yedu in person, we were outside Portland, Oregon having lunch with our significant others. My most memorable time spent recently with Jake was when he was fighting with a water hose under pressure that came loose on the boat during our sailing trip. Our Intel event was not quite that dramatic — but it was thought-provoking nonetheless!

***

It seems impossible to discuss the current market without reminiscing about March, April, and May. In March we saw one of the fastest market drops in history, which prompted a dramatic shift in investor sentiment — from peak optimism to peak pessimism. This dark moment for investors was followed by one of the fastest rallies driven by a sentiment shift from peak pessimism to a fresh peak of optimism. But that’s not the whole story, let’s look at some key points to gain a broader perspective.

1: The stock market tends to overreact. It usually responds early to expected drops in economic activity, and it often recovers ahead of actual improvement. If you see the stock market as a place where you can acquire ownership of a business, and you see businesses as streams of profits, then it becomes logical that when economic activity shrinks, profits tend to follow. Depending on the nature of the business, sometimes a small drop in sales can lead to a significant drop in profits. It’s referred to as operating leverage. There are certain costs that a company can’t cut quickly (rent, for instance), and profits get squeezed. Not all companies have the capacity to withstand a drop in profits (let alone actual losses) and in times of distress such as an economic recession, they risk going out of business if they can’t pay their bills. In addition, if they have borrowed significant sums of money over the years, the debt burden makes them even more vulnerable, and bankruptcy might be inevitable. It’s something we’ve seen with major retailers lately, but not only, even Hertz, the 102-year old car rental company, recently filed for bankruptcy with some $19 billion in debt.

2: The stock market and the economy are not the same thing. The economy encompasses the entire complex activity of all its participants – earning, spending, investing money, time, and resources, while the stock market represents ownership in a selected number of businesses that play roles in the economy. Another way to frame the distinction is activity (the economy) vs. ownership (the market). Many businesses are not represented in the stock market, mostly because they are too small to have public shareholders. Nevertheless, they may play a very meaningful role in our lives and in the economy. They employ tens of millions of workers, pay taxes, and provide goods and service we value. Think of your local grocery store, your favorite restaurant, your hair salon, et cetera. Small businesses represent about half of private sector employment.

At the same time, the U.S. stock market isn’t just American anymore. Many of the listed companies have presences around the world. When we look at the aggregate sales of the S&P 500, a little under half of their sales come from foreign countries. If you choose to own a representative slice of those 500 S&P-listed companies, you are directly exposed to their success and failure in 100+ countries. Some of them are mature and developed – European Union, Japan, Australia — while others are emerging. When you walk past a Coca-Cola fridge in a remote town in Southeast Asia or South America or Africa, spare a thought for the stream of profits making its way to you, the shareholder, half a globe away.

The peculiar nature of the stock market is the availability of the price of all listed companies every minute of every weekday while the market is open. In the U.S. that’s 9.30am to 4pm, Monday through Friday. Buyers and sellers make their investment choices from locations all over the world. If they like the prospects of a business, they buy, and when they get worried, they sell. As long-term patient value investors, we at Sicart follow Warren Buffett’s wisdom: “Be fearful when others are greedy and greedy when others are fearful.” We know exactly what we want to buy, and we zigzag our way through the markets. We tend to buy when others panic, and trim our holdings when we witness boundless unfounded optimism.

3: In March, the stock market felt like a train wreck heading for further disaster. The stock market drop was triggered by the looming economic recession driven by nationwide shutdowns. With constrained ability to earn and spend money, individuals and businesses were expected to come under a lot of pressure, and so they did. The March drop was an attempt to gauge the extent of the economic damage to come. Now, in early June, we are looking at over 40 million jobless claims, and the biggest plummet in corporate profits since the 2008 recession, 13.9% in the first quarter, with the second quarter likely to be worse. We saw a slowdown on Covid-19 cases, and some states have started to gradually reopen their local economies.

4: Based on the macro fundamentals and the actual earnings trends of U.S. companies, we are far from being out of the woods. We’d like to see the second quarter results, and we understand that there is a very real risk of a second wave of the pandemic later this year. With a second wave, we shouldn’t be too surprised to see further lockdowns. China and South Korea have already selectively restored restrictions in response to repeat spikes in Covid-19 cases. The level of uncertainty in March was so high that legendary investor Warren Buffett, with his 90^th birthday around the corner and a dozen market crashes under his belt, decided to not make any purchases in March, and as a matter of fact he made a number of sales. He exited his airline holdings and trimmed his bank ownership. He chose to wait on the sidelines with an ample cash holding ready to be deployed down the road.

5: In late March/early April, investors shifted from peak pessimism to off-the-charts optimism. U.S. stock indices recorded a swift recovery with the tech index Nasdaq reaching a new an all-time high. It almost looks as if nothing had happened. The economy and the labor market have a long way to recovery. Easing lockdowns may offer some relief. It’s hard for us to imagine such an abrupt stock market recovery, and shift in investor sentiment without the unprecedented multi-trillion dollar fiscal and monetary stimulus – more government spending, lower interest rates, and the Federal Reserve’s massive intervention in the markets. This intervention has gone as far as buying high yield bonds, otherwise aptly called junk bonds.

6: A major price vs. value gap. If you see the stock price as what you pay, and value as what you get, today, we are looking at one of the biggest price vs. value gaps. The value of a business comes from its ability to generate sustainable and hopefully growing profits. The profits dropped dramatically for many companies recently. Their new normal level is possibly lower than what we are used to. Despite this backdrop, the stock prices rose back close to the levels recorded early this year, when profits were growing and reaching historic highs. It’s difficult to miss the growing disconnect here, and thus it becomes clear that the stock market as a whole is far from a bargain. In a current moment, the stock market price feels to us like a hugely oversized shoe with a small foot representing the value. The foot has a long way to grow into its shoe or the price level. It’s not impossible for the profits (and the value) to catch up with an excessively high price. If history teaches us anything though, this experience may be a very bumpy ride, and sets us up well for a high likelihood of a sideways market at best. It doesn’t mean though that there won’t be investment opportunities ahead, there will be many, but they will take an extra effort, and caution to find.

***

One of the questions that came up after my recent Intel talk was about our investment principles. The audience wanted to know if they had changed since the March turmoil. As we’ve written in earlier articles discussing investing in times of a pandemic, our principles remain unchanged. We are looking for quality businesses that we can buy at attractive prices and hold for at least for 3-5 years, if not forever. We want to get the most, and pay the least, while avoiding the risk of a permanent loss of capital.

We are reminded here of Benjamin Graham’s wise words, the father of value investing: “Though business conditions may change, corporations and securities may change, and financial institutions and regulations may change, human nature remains the same. Thus, the important and difficult part of sound investment, which hinges upon the investor’s own temperament and attitude, is not much affected by the passing years.”

Train wreck or a train we can’t miss? Where others see rising prices and want to jump in at any cost, we see a growing disconnect between stock prices and the value or the fundamentals. Where are we headed next, then? We have a long wish list of investment ideas and we bought a number of stocks in March and early April. We even made minor additions in May, and even now in June. We are far from building full positions in our new holdings, though; we’ve slowed or even paused our purchases. After sales of certain long-term holdings, we still hold a sizeable cash position ready to deploy, and a gold holding which we see as a hedge against uncertainty, and a potential source of cash when needed. Our stock holdings have done a lot of heavy lifting in the last few months making what we consider to be a respectable contribution to the performance.

We may all have more questions than answers when it comes to the second half of the year, but what we at Sicart know for certain is what kind of businesses we’d like to own, what kind of price we are willing to pay, and most of all, what’s really at stake here – the financial well-being of our clients and their families today, and for generations to come. In these uncertain times, we stand by our investment principles, and we intend to act decisively, but as always with a high degree of caution.

 

Bogumil Baranowski

Published:  6/11/2020

 

 

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

 

Whenever I speak about investing to audiences across the country and around the globe, there is a question that almost always comes up.  For years now, I’ve been asked about the 2008/2009 financial crisis. Someone in the audience usually wants to know what I was thinking at the time and how investing felt in those days. In the coming years, if anyone asks me how March 2020 felt, I have my answer ready– power out, lights out!

As you may know from my earlier emails, Megan and I have temporarily traded our city comforts for cabin life. We have running water up here in the woods, but it’s not drinkable. Instead, we carry 5-gallon water jugs uphill every week or two. These are the same kind of jugs we are used to carrying around marinas provisioning sailboats for trips among tiny islands in the Caribbean. Our internet connection is surprisingly strong – maybe even stronger than the one in our apartment. I suspect our neighbors’ video conferencing and Netflix-bingeing might have had something to do with that! Internet, and water aside, the other essential that we don’t think twice about back in the city – is power!

Only last week, with stronger spring winds, and heavy rains, we had the joy of experiencing a sudden power outage. From a moment to a moment, our life went from busy work with phones charging, laptops on, our old fridge humming – all of which we took for granted — to the complete darkness and silence of the woods. It was a very disorienting feeling for us, city folk, and that’s exactly how March felt to many investors. Darkness and silence, power out, lights out. Impossible to tell which way to go, and what might be right ahead of us.

We at Sicart didn’t know how long the correction would last or how far the stock market would drop. But we did know just what we wanted to buy if prices got interesting. We took advantage of the sharp declines, and started a collection of new investments that we plan to hold for the next 5-10 years and beyond. These are businesses we know well and have been following for years, but we weren’t comfortable with their prices until March. As a matter of fact, I was able to see managements of a few of our new holdings as recently as late February.

The market drop wiped out three years of growth in three weeks. Then the sudden correction was followed by an equally dramatic rally, bringing substantial rapid gains in many of our new holdings. As you know from our earlier articles, we tend to buy stocks only when the price is right.  That doesn’t happen often, so although our trading activity is usually very infrequent, it is decisive. During March and at least half of April, we were active almost every week, nibbling on stocks we like.

At the same time, we had a few “sell” candidates. Some were businesses we had held for a few years which were trading at multi-year or all-time highs. They had already done well, and given the nature of products they sell – canned goods or household necessities — they received an extra boost from investors searching for safety in the midst of turbulent markets.

Other “sell” possibilities were holdings that we refer to as “market protection,” mostly exchange-traded funds that rise in value when volatility or risk aversion spikes. The only market protection holding that we increased in March was our gold holding. We took advantage of the price drop as many investors sought liquidity. With gold prices rising in response to the Federal Reserve’s money printing, this turned out to be a well-timed decision. Gold may remain a long-term holding as an alternative to cash — dry powder ready for future use.

Lights go out, lights come back. As of early May, with US stock market indices having recovered a good portion of March losses, it may seem that the trouble is behind us. But we are not so certain. We are not public-health experts, but from what we are learning, the pandemic may continue for months if not longer. There is also a looming risk of a second wave in the fall, bringing the dangers of premature reopening.

When I have questions about the future, I hardly ever look for answers in the daily news. Rather, I turn to history. Recently Megan lost me for countless evenings to a dense but fascinating read – The Great Influenza: The Story of the Deadliest Pandemic in History by John M. Barry.  It’s over 500 pages long, covering everything you could possibly want to know about the 1918 pandemic, also known as the Spanish Flu. I still believe that Mark Twain was right in saying, “History doesn’t repeat itself but it often rhymes.”

Apart from reading dense history books, we at Sicart spent the last few weeks listening to earnings calls of many publicly traded companies. We were curious not only about how our holdings were faring in these difficult times, but also about how the most vulnerable business sectors are weathering the storm. Those calls reminded us that the first quarter included only one month of lockdowns; the second quarter may look more difficult. We are encouraged, though, by the prompt strategic decisions made by many companies to adapt to the current environment, and position well for the future.

At the same time, we are well aware that a long journey lies ahead of us. Health risks may linger well into the next year.  In response, lockdowns may come and go for some time. If that’s the case, the economic impact will continue, and corporate earnings will reflect it.

For now, the stock market is trying its best to look far beyond the near-term challenges. Some may say it’s too optimistic. Our stock buying wish list remains long, but we have slowed our purchases as prices rose. We plan to remain cautious, acting only when the time is right. Although March and April might have felt like a decade, they were not. The volatile markets may provide us with more windows of opportunity in the coming months.

We cannot predict whether it is the entire market that will drop, retesting March lows, or pockets of the stock market will experience headwinds one at a time. We remain ready to take advantage of either situation. What we do know is that the size, the strength, and the depth of the US economy will ultimately prosper for decades to come, because within that economy there are many wonderful businesses worth owning. We are happy with our market protection holdings, our cash holdings, and a good selection of stocks that we started to replenish in March. We are comfortable holding cash in the short run, but as you know, in the long run, we’d rather own quality businesses with growth potential and pricing power.

Back in the cabin, our first power outage was followed by another one, when one more tree fell nearby. We had learned from experience, and now we keep our flashlights always at hand. And though we might feel we are out of the woods in the stock market, we can’t be certain. There may be more dips, possibly even another bottom for this market before we can say that it’s all behind us. But we’ll be ready: we know what we want to own, and we won’t hesitate to buy it.

As one of our newer clients reminded us recently, turbulent markets could be the best of times to start thinking about your nest egg, your family fortune, and position it well for years to come. We are always here when you need us.

We are hoping you are staying safe and well, and making the best of these peculiar times.

 

Bogumil Baranowski

Published:  5/8/2020

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

 

As I’m sitting today on the porch of a tiny rustic cabin situated next to a creek in thick woods, just a short walk from the Appalachian Trail (a 2,200-mile (3,500 km) hiking trail, the longest in the world, that stretches along the Eastern United States from Springer Mountain in Georgia to Mount Katahdin in Maine), I start to think about the sprints, the marathons, and the very long hikes in life and in investing.

None of these scenarios are superior to the others, but it’s helpful to know which one you are in. I enjoyed sprints in high school, especially when my sudden growth spurt gave me a brief competitive advantage over my colleagues. I’ve watched many New York City Marathons as they passed near my previous two Manhattan apartments. And annually, if my schedule permits, I enjoy long hikes in the Polish Tatra Mountains. Each of these three requires a different kind of preparation, mindset, and stamina. A hiker may look slow next to a marathoner or a sprinter – but he’s part of a completely different race.

In investing, we at Sicart have a very clear goal: to keep and grow the family fortunes of our clients over generations. An investor trying to beat the market in a week or a month can resemble a short-distance winner sprinting to his finish line. Others who want to rank high in 1-, 3- or 5-year portfolio manager rankings can be likened to marathon runners. We, on the other hand, keep moving forward long after those shorter time horizons have been passed. Selecting individual investments and constructing an entire portfolio with a very long-term investment horizon in mind requires a different kind of preparation, mindset, and stamina.

Certain investment opportunities are available to us that can be out of reach for sprinters and marathoners. Certain risks that are unacceptable to us are tolerated by those with more short-range investment horizons in mind. We can buy a piece of a promising business and wait for it to turn around and prosper, while few other investors would have the patience. The last two months, we have been gradually collecting stocks that we plan to hold for the next 5-10 years if not longer. We believe that the businesses we own will not only survive this trying time, but also thrive again. At the same time, as always, we choose not to accept any obvious risks of losing it all, a permanent loss of capital in any of our investments. We can’t avoid all possible risks, but we always do our best to limit their impact on the financial wellbeing of our clients.

***

Speaking of hikes… on a warm, sunny April day about a year ago, I went on a beautiful hike in New York’s unforgettable Central Park with my dear friend Jake Taylor, who is a fellow investor, author, nature lover and the host of a number of very popular investing podcasts. A few minutes into our walk, we stopped on a convenient bench, clipped in our microphones, and started recording a hike interview (you can listen to it here).

Jake’s first question was about my childhood. I described the summers we spent in our small lakeside cabin. I would go on long walks with my dog, an eager ginger English cocker spaniel who loved to chase every hare and duck in a 5-mile radius, as he was always convinced that every walk was a hunting expedition — which it wasn’t.

I knew that what Jake was really after was a peek into my earlier childhood during the last years of communism in Poland. He was curious about shortages, empty shelves, lines outside stores and severe travel restrictions, followed by big government spending, and money-printing leading to a devastating hyperinflation. He wanted to know how that experience shaped me as an investor. I had no way of knowing at the time of our interview how soon those two childhood memories would rhyme with our contemporary reality.

As I’m writing to you this week, in the last days of April, 2020, I’m sitting in a rustic cabin in the deep woods of the Appalachian Mountains. Megan and I traded city comforts of our high-rise apartment with a partial view of Lower Manhattan for just the essential comforts available in a forest setting.

At the same time, in recent weeks, many of us have endured product shortages, empty shelves, and long lines outside stores to shop for basic necessities. The US has stopped issuing passports, banned travel and immigration, and the government is embarking on the biggest spending and money- printing spree since WW2. We are too busy with near-term concerns to worry about inflation or even hyperinflation just yet, but if history were to rhyme not only with my early childhood days but with every money-printing experiment in history, the risk of inflation is a given.

The current pandemic shortages in the US or Europe don’t compare with the unbelievable malaise of the 1980s shopping experience in communist Poland, but do offer a flavor of those days. The one thing they certainly have in common is toilet paper becoming a hot commodity!

***

When the 10-year bull market was approaching its peak in the early 2020, many investors were acting like sprinters, celebrating each week’s success. Now that 3 years of gains have been wiped out in 3 weeks, those investors that plan to stick around may feel like they’ve joined a marathon. True wins in investing don’t come quickly, they realize. But it may be helpful to see investing as a very long hike, not very different from traveling the Appalachian Trail. It will take a different kind of preparation, mindset, and stamina to get all the way from Georgia to Maine — or all the way from the midst of one of the most dramatic economic corrections in decades back to a thriving, growing economy.

In the midst of today’s pandemic waiting game (whether it comes to developing a cure, reopening the economy or rushing back into stocks), we need to remember in what kind of race we are. Some of us will consider it a sprint or maybe a marathon, but I believe we are somewhere between Georgia and Maine, pacing ourselves for a very long hike.

We can make the best use of this time though. I’m inspired to see how many of us are doing their very best to stay healthy and productive in trying times. Talking to friends around the world, I also see a great burst of creativity in how things in our personal and business lives are accomplished in new, better, faster ways. I certainly trust that most of the lasting change that will come out of this period will be positive. I also believe that soon enough we will all be able again to meet, talk, and celebrate – face to face.

Bogumil Baranowski

Published:  4/28/2020

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

I remember taking long road trips with my parents as a kid. We would pack our small Fiat, and head out. Once we visited the lake country in the northwest corner of Poland, and another time it was the beautiful coast of the Baltic Sea. My favorite destination was the charming, often snow-covered Tatra mountains in the south. And like any other kid, the longer the drive, the more often I’d ask — Are we there yet?

Feels familiar, doesn’t it? Our experience of the last month and a half has felt like a long road trip, a detour from the road we thought we are on to a road we had to actually take. We all had an agenda for this year, I certainly did, but this year had an agenda for us.  Megan and I traded a few trips we planned for a lot of time at home, catching up on reading as well as bringing the world to our table by learning new recipes. My usual hours spent behind a desk have turned into a migration pattern: from the dining table to the couch to the living room floor, with my laptop in tow.

Are we there yet, though? We all want to know when we can resume our daily routines – go back to our offices and gyms, our favorite restaurants and coffee shops. When will we see friends and family in person, instead of on computer screens?  At the moment, opinions on the topic range from weeks to as long as 18 months.

We also want to know when our economy will get back on track. When will stores and many businesses reopen? When can they start rehiring? Finally, in the investment world, we want to know if the worst is behind us and our stocks can breathe again.

This pause in economic activity feels like an airplane stalling. This is a maneuver when the pilot intentionally slows the aircraft and, points the nose high enough to make the plane start falling from the sky. Just like a plane, the economy needs to remain in motion to stay up in the air. Stalling an airplane is my least favorite maneuver, but it’s a required part of the training. I’m not a fan of it, and my stomach definitely doesn’t like it either. Stalling economy gave many of us all a similar sensation.

When it comes to the economy, all the restrictions in movement, and social activities have made it harder to spend money. No one is shopping or dining out or going to the movies. Worse, for a large segment of the population it’s now also harder to earn money. The pain is not distributed equally, but large swathes of the economy are clearly “stalled” at the moment. The silver lining here lies in the fact that we know exactly what caused the stall – self-imposed economic shutdown. We also know what will undo the stall – letting the economy rev up, and resume flight! And finally, we’re all aware that completely lifting restrictions too early could cause more harm than good.

The stock market tends to respond in advance of events. When an economic slowdown is expected, the market drops precipitously. When better days are expected, it usually rallies long before actual economic improvement can be seen. We’ve seen two market extremes lately, a swift sell-off followed by a speedy rally. But we may not be out of the woods just yet.

With poor earnings visibility many companies have suspended their earnings guidance, while others are hinting at much weaker results. Still other companies have yet to report their results and give us a sneak peek of the extent of the slowdown. As patient value buyers, we have been taking advantage of the market drop adding a good number of new holdings, yet we have been acting slowly. Bear markets are a great buying opportunity, but caution is required.

We know well what caused our current economic trouble and stock market turmoil. We also know what will help undo it.  In the meantime, let’s make the best use of this time both by learning new recipes at home, and buying up some great businesses in the stock market, when appropriate opportunities arise.

Bogumil Baranowski

Published:  4/20/2020

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

One way or another, we have all paused in the last few weeks. It’s been over a month since Megan and I were sitting on packed suitcases ready to fly first to Paris, and then to Warsaw. Our return flight would have been just a day before the ban on flights from Europe was imposed. Looking back, we are glad we decided to forego our trip. Since then though, with the first day of spring already behind us, we have all had a chance to rethink, and reset as we wait to restart our daily routines.

On the investment side, our approach and our philosophy haven’t changed one bit. We manage family fortunes over generations. We are disciplined, patient investors, and we see ourselves as business owners. Even if the stock market were only open once a month instead of every business day, even if benchmarks and indices didn’t exist, even if the news stopped reporting on the market’s ups and downs, we would invest exactly as we have for decades. We buy quality businesses for their streams of profits, and we want to pay the lowest price possible for them.

With the major indices currently down 25%-30%, and the median U.S. stock price reduced by almost 50%, the current pricing of many businesses looks a lot more compelling. Yet while we have started to “nibble” on many stocks we like, we remain cautious. We still hold ample dry powder to deploy (cash, market protection, and certain holdings we could liquidate to raise cash; for details please refer to our earlier posts). After a closer look, we see that the weakest companies have indeed fallen a lot in the last few weeks, but the highest quality stocks (with some exceptions) have yet to give up large percentages of their bull market gains. If history is any guide, all bull markets come to an end eventually. However, they often bottom out gradually, as investors try to still hold on to their stocks. I’ve heard this phenomenon compared to a cozy bull market turning into an uncomfortable bull ride as volatility spikes.

It’s a good reminder that at the end of each day, every single share of every single company traded on the stock exchange has an owner. There are no shares that nobody wanted that were somehow left behind. This was true even on the worst of recent days, March 16, 2020, when the U.S. stock market dropped 13%. It was the second-largest daily drop since 1987, yet at the closing bell, all shares had an owner, too.

So, who are these new owners, in bear markets? Legendary banker J.P. Morgan is believed to have said that: “In bear markets, stocks return to their rightful owners.”

Then what do these “rightful owners” look for? There are at least three qualities to evaluate in a potential stock investment: profit, growth, and the balance sheet.

When the market is rising, everyone forgets the profit and the balance sheet; what seems to matter most is growth at all cost. WeWork (co-working spaces) was a prime example of the growth frenzy of the last bull market. Long before the pandemic kept us at home and froze much normal economic activity, public markets started to wise up and resoundingly rejected the WeWork initial public offering. It was a swift transformation from a $50 billion valuation to a near bankruptcy.

In times of distress, balance sheets come to the fore. How does a business finance its operations? How much has it borrowed, how much does it owe, when does it have to pay, how much can it self-fund its operations from its profits? These are the questions on everybody’s minds today as we watch convulsions in the credit markets. Until recently, all assets seemed risk-free. Investors chased an incremental percentage point of yield, conveniently overlooking whether or not the company would be able to pay back its loans. That’s changing now, as investors rethink their investment choices, resetting their expectations and risk preferences. It’s helpful to remember that a 30%+ drop in the market will take a 50% rally to recover to a starting point. A 50% drop will take a 100% rally to recover. The importance of not losing money has come to the forefront of everyone’s attention.

Beyond market’s constant mood swings from optimism to pessimism, though, what we believe truly counts in the long run is a company’s profits. Do we own a business with lasting, growing profits (otherwise called cash flows)? And finally, what do we need to pay for each dollar of annual profits? As value buyers, the less we have to pay, the happier we are.

To make good investment choices, we think in terms of the next 3-5-10 years, trying to see where the businesses we buy could be in the following years, as pent-up demand is unleashed and our former lives restart.

***

Our daily routines have changed for now. In the first days of our self-imposed lockdown, Megan asked me how I would send my shirts to the dry cleaners. I told her that I wouldn’t be needing fresh shirts every day for a while. I haven’t actually worn a suit in over a month, which might be a record in my adult life.

As you might remember from my earlier articles, I find daily news, and minute-to-minute updates highly distracting. In the first days of the self-imposed lockdown, we spent way too much time trying to track each new development. Since then I’ve returned to re-reading annual reports, refreshing my memory about so many good businesses on our wish list.

Since I’m saving somewhere between five to ten hours a week on my commute, I’ve found another replacement for the daily news. I signed up for online courses with Udemy, which I highly recommend. I’ll share more in the coming weeks, but if you need a healthy distraction for your mind in these peculiar times, taking an online course could be an idea worth entertaining!

All the same, we at Sicart have had full days in these last four weeks. Between calls with clients, research, and trading, days seem to fly by. I have also been writing, and preparing some items on weekends to have a head start before each new week. For us as stock pickers, it’s been a fruitful and exciting time.

While we remain uncertain about the near future, and long to know when we’ll be able to resume our social activities that we once took for granted, let’s not forget what remains certain. However long the pause, we believe that the businesses we own will continue to sell goods and provide services everyone wants, and our investments will once again, we believe, deliver respectable returns, pulling our portfolios forward.

Maybe this crisis will bring a silver lining, too. In many ways it has brought us closer, made us more compassionate, allowed us to slow down. Meanwhile we’ve been relying on technology to keep us connected, keep us working, and keep us entertained. Until it’s over, let’s stay home if we can, let’s avoid crowds, and let’s make this a time to rethink, reset, and restart.

Bogumil Baranowski

Published:  4/7/2020

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

The last few weeks have felt like years to most of us. Out of nowhere, we have been wakened from a low-volatility, 11-year-old bull market to a stormy market crash. We’ve seen record-breaking daily moves, mostly downward. Three years of gains have been erased from the major indices in as many weeks, a process that feels like taking a slow escalator up and a fast elevator down.

To me the wakeup call came in the last day of the most recent conference I attended. It was in late February in Florida, and after spending a few days with CEOs of major US companies, I finally saw the headlines reporting town lockdowns in northern Italy. In response I soon decided to cancel my trip to Europe … then two more trips. Not long afterward, we all started working remotely.

Last week, from the comfort of my home, I had the great pleasure of joining MOI Global’s John Mihaljevic for an impromptu virtual Q&A session aptly titled “Intelligent Investing in Crisis Mode.” Among John’s guests sharing their perspective were Howard Marks, Tom Russo, Guy Spier, and other highly respected value investors from around the world.

Before we dove into the topic of building a portfolio in the time of crisis, John asked me how my daily routine had changed in the last few weeks. My answer: I stay home, I save an hour on my daily commute, and Megan and I have time to bike almost every day to get some exercise. I also admitted that until a day or two ago, I was reading far too much daily news keeping up with the incessant pandemic updates. I decided to change that. Otherwise, it’s business as usual – patiently looking for ideas.

As you might know from our earlier posts, we at Sicart entered this treacherous time in what we believe is a very favorable position. We have ample cash. In addition, we hold what we call a “market protection” in the form of gold holdings, and certain exchange-traded funds that go up when volatility and risk spike. We positioned the portfolios this way not over the last few weeks, but over the last few years.

Ahead of a likely economic slowdown, we had also consciously pruned our portfolio to eliminate overvalued late-cycle names, replacing them with stocks chosen on the basis of their financial strength. We had no way of knowing that a pandemic was around the corner, but we have been cautious for a while. We wrote and talked about it extensively. Market valuations were undeservedly high, fundamentals were stretched, and we believed that we were due for a reality check in the form of a market correction. The panic selling triggered by the virus, followed by the expected drop in demand and diminished economic activity, happened to be the catalysts.

Just as we had no way of knowing when the record-breaking bull market would end, we can’t predict the duration of the current accelerated market sell-off.

As we always have, we will respond slowly and gradually. Mirroring the way we’d been trimming our holdings during the market’s rise, we will begin adding to current ones, and starting new holdings as we wait for the market to bottom. I’ll emphasize “gradually.”

The slow pace of acquisition saves us from having to time the market or attempting to call where its top or bottom might be. At the same time, it gives us the opportunity to build long-term positions in great businesses that would otherwise be too expensive to offer a sufficiently attractive return. This is a moment to start building a portfolio for the next 3-5-10 years and beyond.  

We see that a median U.S. stock is already down 50% (Bloomberg, Value Line Geometric Composite Index), and that market benchmarks are off by one-third. As dramatic as that drop may seem, we believe there is room for further correction, especially among stocks that have been part of the most recent market rally. The ultimate sign of capitulation would be a sell-off in the market darlings of the last few years as panic-stricken investors sell to raise cash. This may not occur soon, and it’s possible that the market darlings might be safe this time around. If we do see a sell-off among the high fliers of the last few years, we believe, it would be an indicator that the bottom is closer.

As we wait for the market shakeout to play out, we started to “nibble” on some stocks. We have a long wish list of those that we’d like to own at the right price.

What are we buying? There are at least three big buckets of opportunities ahead, in our opinion. The first are companies that should experience limited impact from the demand drop triggered by travel and movement restrictions. That group includes a number of companies that fell as much as the market or more. We believe that their sell-off was driven mostly by investors selling indiscriminately, regardless of the underlying quality of the business. These stocks were further hurt by investors who quickly needed to liquidate their holdings under pressure. We’ve made some small acquisitions in this segment of the market.

The second group consists of companies that will experience some impact from current restrictive policies, but should endure on the basis of their position, financial strength, and business quality. Among them, we find a number of stocks whose prices have already come down. This gave us the opportunity to initiate small positions, but we believe we may see lower prices down the road. These are companies that are often too expensive for a disciplined investor, but in times like this may be within reach, and offer sufficiently attractive returns from current prices.

The last group are companies more directly impacted by the economic shutdown. This group has likely the largest possible upside given their turnaround potential in the future. However, they could also carry the real risk of a permanent loss of capital. We are currently refining a short list of companies that we may buy as a basket in order to diversify the risk while still capturing the potential — and possible — growth. Naturally in the last group, we will do our best to avoid any companies that demonstrate an obvious high risk of a total loss.

How will we fund our acquisitions? We have three sources of capital ready to deploy. Despite some minor purchases in the last few weeks, we still hold ample cash. It can be used on whatever timetable appears most productive. The second source of dry powder will be our market protection, which is playing its role for now. Our third source of capital will come from a number of holdings we’ve added over the years which not only held up well in the sell-off, but also offer products and services that are considered necessities. Demand for them will probably remain steady or even spike as shoppers stock up on canned soup and toilet paper, or churn through their phone and data plans as they work from home or binge-watch TV shows.

***

Yes, this is a “staycation” we didn’t ask for. For us, as disciplined patient investors managing family fortunes for generations, it presents one of the most compelling buying opportunities in our investment careers. While many market observers obsess over where the bottom of the market might be, we act slowly but decisively. There has never been a bottomless market in the history of investing, and this one will have a bottom, too.

As one of our newer clients told me recently, “If I wasn’t with you already, this would be the perfect time to join!” In fact, we are on-boarding a new client in the midst of this turmoil. If you aren’t yet one of our clients but feel that you’d like a steady hand in these times, we’d would be delighted to have you join us.

***

With a stock market sell-off in background, and a looming economic slowdown, policy makers are searching for quick immediate fixes, utilizing zero interest rates, open-ended quantitative easing, multi-trillion-dollar bailouts — unprecedented money printing, borrowing, and spending. We might be trading one problem for another down the road. When too much money is chasing too few goods, inflation usually follows. This reminds us again that investing constantly requires us to see not where the ball is, but where it will likely be.

The government’s strategy may help soften the economic impact of the current situation but we might need to wait months or even longer to see a real improvement. Let’s keep it in perspective, though: this may feel like wartime in the stock market, but no production capacity is being destroyed and no bridges have been burned. It’s just that some assets may change owners at a lower price.

My grandma, a woman of boundless optimism, told me this week, “I was born during the Great Depression, lived through World War 2, the Nazi occupation, 45 years of communism, and martial law in 1980s Poland — this too shall pass.” It’s a good time to call your family and friends, since they too might have wisdom, and a new perspective to share in these unusual times.

I was supposed to go to Italy in May to attend the wedding of dear friends. That’s not going to happen now. I like to think that it was postponed rather than cancelled, and they have already rescheduled it for May 2021! It’s easier to look at everything else around us as postponed rather than cancelled. The world will go on. Pent-up demand will return. In the meantime, our best choice is to stay home and stay out of the way, for our health and that of everyone else.

Bogumil Baranowski

Published:  3/23/2020

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

“Investing is dealing with imprecise assumptions tainted by an imperfect world haunted by uncertainty” – that’s how I described investing in my 2015 book – Outsmarting the Crowd: A Value Investor’s Guide to Starting, Building, and Keeping a Family Fortune.

Uncertainty is always a part of investing. We never know exactly what the future holds, but when it comes to specific quality businesses that we like to own, we can make the best educated guess about their future, and if we buy them at the right price, the odds are in our favor that they will turn out to be good investments in the long run.

Last few weeks, and likely the coming months, will probably be one of the most uncertain times in our investment careers. It is important to understand well the nature of this uncertainty though. There are at least three sources of uncertainty we are facing: the impact on public health, the impact on the economy, and the impact on the stock market.

Of course, at very top of our concerns is a very real public health risk associated with the spread of the new virus. We hope that all the right steps will be taken to slow down the spread, and offer care to those in need. We understand that the very least we can all immediately do to help as individuals is stay home, work remotely if possible, and otherwise avoid crowds. Needless to say, if anyone who is not feeling well should stay home as well.

The impact on the economy is a big open question mark. We see it in two dimensions though. How deep of a cut in the economic output we may expect, and equally important, how long it will last. We will continue to have a better understanding of both dimensions as time passes. The bright light at the end of the tunnel for us is the recovery that will follow though. What encourages us the most is the pent-up demand that will be unleashed once it’s safe again to not only go back to our normal routines, but maybe even treat ourselves for the time spent in four walls with Netflix and some hastily chosen snacks. Let’s think for a minute of all those small and big pleasures we are saying no to these days — from lovely dinners with friends to trips to sunny Italy!

The impact on the stock market is much more visible and immediate than the impact on the economy. Stocks trade five days a week, and every second of the trading day all participants try to do the impossible — guess the short-term impact of the virus on the economy, and corporate earnings.

As investors, we see ourselves as business owners. When we buy a business, we want to hold it ideally forever, but at least for 3-5 years. As you know well from our earlier articles, when we buy a business, we buy its stream of profits from now until the end of its existence. One quarter, one year even have a limited impact on the long-term earning power of a business. That quarter though, especially a weak quarter has a big impact on the stock price. That’s where short-sighted investors panic, and sell a stock, while long-term investors come in and buy the stock to hold it for the long run.

As dramatic as the daily stock market moves can be, we never see volatility as risk, but as an opportunity for a patient disciplined investor. The risk to us is a possibility of a permanent loss of capital. In times like this, the shareholders of the more vulnerable companies with weaker businesses models, and higher leverage can experience a permanent loss of capital or close to it. That’s a loss that can’t be recovered. The stock price drop in a strong quality business is just a passing paper loss though.

In any market sell-off or times of economic weakness certain industries may be affected more than others. This time around anything related to travel has taken the biggest, and the most immediate hit. Airlines, cruise lines, hotels, restaurants have all experienced a big, and sudden drop in demand, thus a drop in revenues, and given their high fixed costs, likely big losses. Some of them might be in a position to weather the storm, others might not be so lucky. We don’t own any stocks in those industries. We made a frequent point in our previous articles that what we don’t own matters as much as what we do own.

After few weeks of record market swings, the obvious question arises – when does it end? Where is the bottom of the market? Now, if you followed our articles over the last few years, you know that we couldn’t time the top of the market. Today, we won’t be able to time the bottom of it either, we will do what’s possible though, which is gradually buy, the same way we were gradually selling. We are slow when we want to be, and we can act fast, and be decisive when we need to be. We plan on building positions in existing holdings, and expand our portfolio with new picks from our long wish list.

Over the last few years, we grew increasingly uncomfortable with the stock valuations, and the excessively high level of the stock market. For that reason, we grew our cash position, we also added what we call – market protection in the form of a gold holding, and a few exchange traded funds that go up when volatility and risk aversion spike. That gave us a softer landing in this dramatic sell-off, and has already given us dry powder to deploy. Again, we are acting very slowly.

We are long-term patient disciplined investors, and we manage family fortunes over generations. The last few weeks, we have heard from many of our clients who appreciate the steps we took at the top of the bull market, and the steps we are taking now. We even have a new client join us in the midst of these uncertain times, and we are grateful for this vote of confidence.

We know that many of us have seen empty shelves in our local stores, many of us stocked up on canned food, cancelled trips, changed plans, and severely curtailed our daily and weekly routines. Let’s not forget though that it’s not forever, it’s just for now, the same way, the economic weakness, the stock market sell-off are not forever, just for now. The U.S. economy is big, strong, diverse, and the vast majority of the U.S. businesses are here to stay, and they will prosper for generations to come. In the midst of this storm, we may have a rare chance to buy many more of them at enviable prices, and we will do so. Again, very slowly.

We hope you and your families are staying safe, and taking necessary precautions. We are always here; we are always reachable if you need us.

Bogumil Baranowski

Published:  3/16/2020

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

The last few weeks have been anything but calm. We keep on learning more about the coronavirus spread around the world, and the decisions made to address it. We certainly hope that all the right steps will be taken to not only slow it down, but also to provide sufficient help, and care to those in need.

We feel that if anything, this peculiar time has brought many of us closer. We heard from many of our clients, some called, some emailed, some let us know they are keeping up with our updates. We are always here if you need us. In the last few days, we also spent more time talking to our families, our friends around the world, including those we haven’t had an opportunity to talk to in a while. I even had a chance to chat with a good grad school friend who recently relocated to Vietnam.

Megan and I have been taking daily long walks along the Hudson River waterfront. This weekend, we also took our bicycles out for the first time this season. If you are feeling overwhelmed with the news flow, a nice walk, a bike ride can do more good than any dose of hand sanitizer.

In times like this, our ability to remain available to our clients, and our ability to conduct business as normal are our priority. We remember well, how Sicart Associates was launched from our respective living rooms in the summer of 2016. I was sitting at home in my shorts and flip flops, with my laptop, and a phone ready to embark on this new adventure. Building a new firm, we made sure we use the right technology that can enable us to work, and stay connected even if we are apart, and we need to work remotely. We plan to lean on that capability more in the coming weeks.

On the investment side, it’s a good time for a reminder of what we do, what our approach is, and what our values are. We are long-term patient disciplined investors, and we manage family fortunes over generations. We are stock pickers, and business owners. To us, shares of companies represent ownership in real businesses. Businesses that provide goods and services that people need, and want.

When we buy a business, we see it as a purchase of its stream of earnings from now until the end of its existence. A few months, or even a year-long drop in earnings, has little impact on the long-term earning power of the business, in our opinion. It may have an impact though on the quoted stock price, but the lower the price we pay, the better returns we can expect in the future. The businesses we buy we intend to hold for at least 3-5 years, and if possible, forever.

The businesses we like are here to stay. Looking at the businesses we own today, we can say with a good degree of confidence that consumers will still buy soap, tomato sauce, make phone calls, use the internet or receive packages. In some businesses, we may actually see a pick up in demand as shoppers briefly adjust their preferences, and habits in response to recent developments.

This week, the bull market would have had its 11^th birthday. Instead of new market highs, we have seen a big increase in market volatility with big daily drops, and rallies. The stock market indices in the US dropped by about 17-20% from their highs.

For passive index investors or those who are always fully invested, there are very few options left other than waiting it out without giving in to panic selling.

For a while now, we have held ample cash preparing for a potential market correction given inflated market valuations, and the stretched fundamentals. We have also emphasized in our stock selection the resilience of the businesses, and their financial strength. We also used a variety of market protection tools – we hold gold, and in some cases exchange traded funds that go up when the market drops or the volatility picks up.

The cash holdings served as a buffer on the way down, and now can be very gradually used to buy stocks at lower prices. We have a list of stocks we would like to own, and prices in mind that we are willing to pay. The volatility and the market drops may create further buying opportunities in the coming weeks and months.

We hope you and your families are staying safe, and taking necessary precautions.

If you have any questions, we are always here to help.

Warmest wishes,

Bogumil Baranowski & the Sicart Team

 

 

Published:  3/9/2020

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

We talked about it, we wrote about it, but now that it is happening, it’s never fun to watch. We discussed how the market valuations are inflated, how the fundamentals are stretched, and how 2019 eye-popping stock performance was driven by prices going up, not by earnings rising. We knew that it’s a matter of time when the market catches up with the reality. What is always impossible to say is – when.

We took the best approach that worked in the past, and was likely to work in the future. We took money off the table, pruned the most vulnerable positions, held excess cash, avoided the highest-flying stocks that have the most room to fall.

We wrote how cash is not only a buffer on the way down, but most of all dry powder that we can use when the market or individual stocks drop.

The last year and half, we slowly added a number of new holdings whose prices dropped to multi-year lows. We took advantage of the December 2018 sell-off, few other corrections since. This week, many of you intuitively knew already that we have been slowly, but consistently putting more money to work as the market started to drop.

This week we have witnessed one of the fastest corrections on record. Earlier this week, we shared a study showing how historically bear markets can quickly reclaim the bull markets’ gains. What we have seen so far is the market taking back the entire gain recorded since last summer, including the Federal Reserve sponsored rally. Historically, the faster the rise we enjoy, and the less substantiated by fundamentals it is — the more dramatic the fall.

For a while, we had believed that U.S. equities had entered a bubble territory, and it was a matter of time what “pin” will pierce it. There were many clouds on the horizon, but nothing was able to slow down the climb. Today, it seems that it’s the coronavirus scare that broke the camel’s back.

Now, we have no way of knowing what the end impact of the virus will be on our health, the economy, and the stock market. We are well aware of the global exposure of U.S. companies, and we would expect a meaningful, but hopefully short-lived impact on earnings, thus also stock prices in the near future.

In many conversations over the last months, and years, our clients asked if we anticipate one big sell-off or a sideways market. We always said that we are ready for both, and will adapt to either, and do what we do best — identify quality businesses, and buy them at attractive prices. We also emphasized that stormy markets show who was lucky, and who is doing the work, and conducting a diligent stock selection. In a rising market, everybody seems to be a hero. In a difficult market, there are many more opportunities, but not for passive investors or “index huggers”, but for those who know what to buy, and when to do it.

Calm markets or stormy markets, we are always keeping a steady course. As we wrote on many occasions, we have an extensive wish list of businesses we would like to own, and when others panic, and prices drop, we have a tremendous opportunity to buy them at very attractive prices.

Our patience always eventually pays off. We have been in no rush to chase the market to its top, and we are in no rush to jump in, but you will see us take very decisive, but gradual steps adding to our holdings in the coming days, and months.

Slow and steady wins the race.

If you have any questions, we are always here to help.

Warmest wishes,

Sicart Team

 

 

Published:  2/28/2020

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.

Recently I had a conversation with a prospective client who wanted to know about our experience managing family fortunes over generations. Coming from a money manager who always likes to be fully invested, he was intrigued by our choice of holding some cash on the sidelines, ready to invest. “So, you’re timing the market?” he asked. I answered with a smile that we don’t time the market, we don’t know how.

As we at Sicart see it, “timing a market” would be an attempt to stay fully invested all the way to the top, yet at the same time hoping that we would be able to sell early enough to avoid the pain of a drawdown.

My friend Jake Taylor, in his recent investor letter, shared a chart (see below) that I found eye-opening. It shows what fraction of bull market gains were “repossessed,” or dissipated in the following bear market. Since 1933, five bear markets have wiped out more than 100% of preceding bull market gains. One of those times happened during my career, and two happened in the first five years of my partner’s François Sicart’s career (1969, 1973).

Source: UPFINA and January 2020, Investor Letter, Farnam Street Investments

In my almost forty-year lifetime, the U.S. market has endured 5 bear markets that took away half or more of preceding bull market gains.

As of early 2020, the S&P 500 hovered at 3,300 — a long way away from the low of 666 reached almost 11 years ago on March 6, 2009. If the index were to give back half of the gains earned during this longest-ever bull market, we would see a round 40% drop from current levels. If it were to relinquish all of its gain, we would see an eye-popping 80% drop from here. We certainly hope that won’t happen. However, we can’t help remembering that 2009 lows dipped below the previous low mark, when the S&P 500 dropped by 50% after the Internet Bubble burst. If history teaches us anything, it is that past downturns don’t necessarily represent the floor for even the most dramatic drawdown.

We are not trying to scare anyone away from the stock market, quite the contrary. If anything, we strongly believe that everyone should be a lifelong investor. We also believe that stock investing is a great path to not only preserving, but also growing family fortunes over generations.

However, the movements of the stock market are sometimes irrational. Extreme optimism follows extreme pessimism, greed alternates with fear. We wish we knew how to call market peaks and troughs but it’s harder than it looks.  We remember well how some observers believed that early 1999 would bring the market peak, only to see NASDAQ (the technology index), double in the following 12 months. The bubble didn’t burst until March of 2000. Until not long ago, we have been hearing how just because the market has gone up a lot, it doesn’t mean it can’t go higher. Many have believed the Fed hasn’t finished pouring gas on the fire. In the meantime, short-sighted investors have been calling for more corporate buybacks that further bid up stock prices. Could we see the major indices climb another 100% from here? It’s not impossible. Anyone suffering from FOMO (fear of missing out) may get sucked in to the market frenzy.

Now, more recently, investors traded the risk of a market melt-up for the risk of a sudden sell-off. When I started writing this article, the U.S. stock market was reaching new highs with no signs of slowing down. As I’m putting finishing touches, we just witnessed a 1,000-point daily drop in the Dow Industrial Average with all major US-indices deep in red.

A melt up, a sell-off, just correction? The important question remains how can we know when to get in, when to get out? We honestly confess that we don’t know. We also suspect that anyone who believes they do is deceiving him- or herself — not to mention anybody listening to them.

The best approach for us has been to gradually take money off the table, trim our most overvalued positions, and, if possible, replace them with holdings that are more attractively priced.

We don’t time the market because we don’t know how to. Instead, we choose each investment based on its merits. Our securities (stocks) are selected based on quality, purchased based on value, and held with the business owner’s mindset. When the picking gets slim, we let the cash position grow. In turbulent times, we shop for bargains with the cash we’ve kept on the sidelines for this very purpose.

We are patient and prepared for the shopping spree of a lifetime.

Happy Investing!

Bogumil Baranowski

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Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.